6 Review of BPC DGPC Electricity Tariff Proposals

Bhutan Chamber of Commerce and Industry
REVIEW OF THE ELECTRICITY TARIFF

REVISION PROPOSAL (JULY 2013 JUNE
2016) SUBMITTED BY BPC AND DGPC TO
BEA
FINAL REPORT
29 July 2013
LIST OF ABBREVIATIONS
BEA
BPC
CoD
CoE
DGPC
DOE
GoI
GWh
HV
INR
kW
kWh
kV
kVA
LF
LV
MV
MVA
MW
Nu
O&M
PF
PLF
PPA
RGoB
RoA
RoE
TDR
WACC
- Bhutan Electricity Authority

- Bhutan Power Corporation Limited
- Cost of Debt
- Cost of Equity
- Druk Green Power Corporation Limited
- Department of Energy
- Government of India
- Giga Watt Hour
- High Voltage
- Indian Rupee
- Kilo Watt
- Kilo Watt hour
- Kilo Volt
- Kilo Volt Ampere
- Load Factor
- Low Voltage
- Medium Voltage
- Mega Volt Ampere
- Mega Watt
- Ngultrum
- Operations and Maintenance
- Power Factor
- Plant Load Factor
- Power Purchase Agreement
- Royal Government of Bhutan
- Return on Asset
- Return on Equity
- Tariff Determination Regulation - 2007
- Weighted Average Cost of Capital
TABLE OF CONTENTS
1.
EXECUTIVE SUMMARY .................................................................................................................. 1
2.
BACKGROUND ................................................................................................................................. 3
2.1
ESSENCE OF THE HYDROPOWER SECTOR IN BHUTAN ................................................ 3
2.2
ELECTRICITY USAGE IN BHUTAN ....................................................................................... 4
2.3
FINANCIAL PERFORMANCE OF DGPC AND BPC............................................................ 4
2.4
VALUE ADDITION OF THE INDUSTRIAL SECTOR TO THE ECONOMY .................... 6
2.5
HISTORICAL TARIFF RATES ................................................................................................... 9
3.
INTRODUCTION ............................................................................................................................. 11
4.
DGPCs TARIFF REVISION PROPOSAL ..................................................................................... 11

4.1
5.
PARAMETERS USED IN THE DETERMINATION OF TARIFF ....................................... 11
4.1.1
WEIGHTED AVERAGE COST OF CAPITAL (WACC) ................................................... 11
4.1.2
OPERATION AND MAINTENANCE COST ..................................................................... 14
4.1.3
OPERATION AND MAINTENANCE EFFICIENCY GAINS ........................................... 15
4.1.4
REGULATORY FEES ......................................................................................................... 16
4.1.5
INFLATION ......................................................................................................................... 16
4.1.6
DEPRECIATION .................................................................................................................. 16
4.1.7
INVESTMENT PLAN .......................................................................................................... 17
4.1.8
ARREARS ............................................................................................................................ 17
4.1.9
DESIGN ENERGY ............................................................................................................... 17
4.1.10
AUXILLARY CONSUMPTION AND PLANT AVAILIBILITY .................................... 18
4.1.11
ANNUAL ENERGY GENERATION ................................................................................ 18
4.1.12
ROYALTY ENERGY ........................................................................................................ 18
4.2
FINAL TARIFF STRUCTURE ................................................................................................. 19
4.3
RECOMMENDATIONS .......................................................................................................... 20
4.4
CONCLUSION .......................................................................................................................... 22
BPCS TARIFF REVISION PROPOSAL ........................................................................................ 24

5.1
STRUCTURAL CHANGES IN THE TARIFF PROPOSAL ................................................. 24
5.1.1
DEMAND CHARGE BASED ON kVA RATHER THAN kW .......................................... 24
5.1.2
MINIMUM AMOUNT FOR LV CUSTOMERS ................................................................. 25
5.1.3
ELIMINATION OF CROSS SUBSIDY............................................................................... 26
5.1.4
UPWARD REVISION OF MISCELLANEOUS CHARGES .............................................. 27
5.2
PARAMETERS USED IN THE DETERMINATION OF TARIFF ....................................... 29
5.2.1
WEIGHTED AVERAGE COST OF CAPITAL (WACC) ................................................... 29
5.2.2
OPERATION AND MAINTENANCE COST ..................................................................... 32
5.2.3
OPERATION AND MAINTENANCE EFFICIENCY GAINS ........................................... 36
5.2.4
REGULATORY FEES ......................................................................................................... 36
5.2.5
INFLATION ......................................................................................................................... 36
5.2.6
DEPRECIATION .................................................................................................................. 37
5.2.7
INVESTMENT PLAN .......................................................................................................... 38
5.2.8
ALLOCATION FACTOR .................................................................................................... 40
5.2.9
ARREARS ............................................................................................................................ 41
5.2.10
EMBEDDED GENERATION ............................................................................................ 41
5.2.11
COST OF SUPPLY ............................................................................................................ 42
5.2.12
COLLECTION RATE ........................................................................................................ 45
5.2.13
NON-TARIFF REVENUE ................................................................................................. 45
5.2.14
LOSSES .............................................................................................................................. 46
5.2.15
DEMAND CHARGES ....................................................................................................... 46
5.3
FINAL TARIFF STRUCTURE .................................................................................................. 48
5.4
TARIFF IMPACT ....................................................................................................................... 49
5.5
RECOMMENDATIONS ........................................................................................................... 51
5.6
CONCLUSION ........................................................................................................................... 55
Review of the tariff revision proposal submitted by DGPC and BPC for the tariff period 2013 to 2015
1.
EXECUTIVE SUMMARY
In line with the Tariff Determination Regulation (TDR) 2007, both the Bhutan
Power Corporation Limited (BPC) and Druk Green Power Corporation (DGPC) have
submitted a proposal to the Bhutan Electricity Authority (BEA) to revise the current
electricity tariff regime for the period July 2013 to June 2016 as the current tariff
period ended on 30 June 2013.
The tariff period proposed by both the licensees is for a period of three years and
accordingly both BPC and DGPC have proposed a tariff structure that is flat and will
remain static for the entire duration of the three years without any provision for an
annual increase during the tariff period. It is however recommended that as this will
cause a drastic rate shock for customers when the tariff is revised, a more gradual
increase be implemented wherein the tariff rates are increased at a reasonable rate
annually for the duration of the three year tariff period.
DGPC has submitted a tariff revision proposal to increase the current energy sale
price to BPC from Nu. 1.2 per kWh to Nu. 1.99 per kWh for the additional energy
quantity, which is the amount of energy drawn above the royalty energy limit.
Accordingly, this will have an impact on the prices for end users of electricity in the
country across all categories as BPC passes on this energy purchase price onto its
customer.
Similarly, BPC has made a tariff revision proposal wherein the rates across all the
customer categories (LV, MV, HV and wheeling) will see an upward revision.
This report reviews all aspects of the tariff revision proposal that has been submitted
by both BPC and DGPC. The review conducted in this report on the proposal made
by both BPC and DGPC has been done so in line with the TDR and BEAs Tariff
Review Report (September 2010). Based on the review of both the proposals, it has
been found that the values assumed for many of the parameters used to determine
the final tariff rates are not admissible as they are not in line with generally accepted
principles or the basis that was used and approved by the BEA while reviewing the
tariff proposal for the last tariff period (August 2010 to June 2013).
Although, DGPC has proposed an upward revision in the generation price from Nu.
1.20/kWh to 1.99/kWh, this report recommends that the energy sale price to BPC be
set at not more than Nu. 1.19/kWh for the additional energy and be free for the
royalty energy. It is to be mentioned here that the tariff for the additional energy will
be lower than this calculated rate as a lot of other cost figures for DGPC were not
available such as the value of assets not belonging to DGPC but which have been
included in the asset schedule, the quantum of allowable corporate office costs,
break-up of the Operation and Maintenance costs, etc. Only with the availability of
these actual costs, will it be possible to actually arrive at the final tariff rate for the
additional energy.
This report also does not recommend the final tariff rates for the various customer
categories of BPC as a lot of information pertaining to the cost structure was not
available. Furthermore, the quantum of subsidy to the various customer categories,
which will be decided by the BEA and the RGoB, will determine the final tariff rates.
It is also to be mentioned here that the review of BPCs tariff proposal pertains to the
first submission to BEA and not on the revised one as presented during the public
hearing held on 18 July 2013.
Page 1 of 56
The following table summarizes the tariff proposal submitted by BPC.

Table 1 : Summary of the electricity tariff rates (current and proposed)
BPCs proposed
Customer Category
Current tariff
% increase
subsidized tariff
Low Voltage (LV)
0-100 kWh (Nu./kWh)
0.85
1.00
17.65%
101-300 kWh (Nu./kWh)
1.62
4.10
153.09%
300+ kWh (Nu./kWh)
2.14
4.10
91.59%
LV bulk (Nu./kWh)
2.14
4.10
91.59%
Average tariff for LV
1.62
3.29
103.09%
Medium Voltage (MV)
Energy charge (Nu./kWh)
1.79
1.20
-32.96%
Demand charge (Nu./kVA/month)
115.00
856.00
644.35%
One part tariff for MV
2.16
4.30
99.07%
High Voltage (HV)
1.54
1.20
-22.08%
105.00
441.00
320.00%
One part tariff for HV
2.40
37.93%
1.74
Wheeling charges (Nu./kWh)
0.111
0.160
44.14%
Note : The current tariff for demand charge for MV and HV customers is based on
kW and not on kVA
The tariff rates proposed by BPC as shown in the above table is also assuming that
the additional energy and royalty energy rates payable to DGPC are maintained at
the current level of Nu. 1.20/kWh and Nu. 0.13/kWh respectively. If these rates are
increased, as proposed by DGPC, the end-user rates will be higher by a significant
margin.
Page 2 of 56
2.
BACKGROUND
Before delving into the details of reviewing the tariff revision proposal as submitted
by both DGPC and BPC, it is imperative to understand some major issues related to
the electricity sector and the economy of Bhutan as a whole as these issues have not
been considered in the formulation of the regulations determining the electricity
prices in Bhutan.
However, these issues are very important in the context of finalizing the end user
electricity prices and need to be borne at the back of our minds while reviewing the
tariff proposal. Accordingly, these issues have been highlighted in the ensuing
section.
2.1
ESSENCE OF THE HYDROPOWER SECTOR IN BHUTAN
The essence of developing the hydropower sector in Bhutan way back in the early
70s with Chukha was based on the fact that it would be a way to kick-start the
Bhutanese economy. Although the element of exporting the surplus electricity was
also seen as an opportunity for Bhutan, this was not the principal objective of
developing hydropower plants. Consequently, in all our Power Purchase
Agreements (PPA) with the Government of India, it is explicitly mentioned that only
the surplus electricity after meeting Bhutans domestic requirements would be
exported to India. There is no minimum energy requirement to be exported from
Bhutanese hydropower plants as most PPAs are modeled on. This provision was
included in all the PPAs with India so as to enable industries to come up and provide
them with electricity as a first option before export.
Bhutans competitive advantage on the industrial front has been relatively cheap
electricity and this has been the only reason why many power intensive industries
have been set up along the southern foothills on Bhutan close to the Indian border.
There is no way that our industries can compete with the cheap labour or the low
transportation rates in India and the neighboring countries. These industries add a
lot of value to the Bhutanese economy by way of bringing in much needed Indian
Rupees/hard currency, providing jobs, paying taxes to the Government and other
positive multiplier effects to the economy as a whole.
The hydropower sector in Bhutan was developed with the primary aim of nurturing,
developing and supporting the industrial sector in Bhutan rather than for export. The
two state run monopolies currently operating in the electricity sector, DGPC and
BPC, are already making huge profits and it is envisaged that they will always
continue to make huge profits as the tariff determination mechanism is based on a
cost-plus model wherein all the costs incurred by them are covered. Furthermore, a
margin for profits is allowed after covering for all costs.
The electricity tariff proposed by both the licensees is a huge jump as compared to
the current rates (DGPC has proposed to increase the rates by 66% and BPC has
proposed to increase the rates by 38% for HV, 99% for MV and 103% for LV
customers). If the electricity tariff as proposed by both the licensees is approved, it
will translate into many businesses closing shop as it will not be a viable proposition
any more.
Accordingly, the impact of revising the electricity tariff upwards to make only the
electricity sector more profitable (although the two companies are already making
Page 3 of 56
huge profit margins currently) at the cost of the industrial sector and the business
community is not in line with the essence of developing the electricity sector in the
first place.
2.2
ELECTRICITY USAGE IN BHUTAN
A lot of research has already been conducted in the past on the positive relationship
between the usage of electricity and quality of life. It is now an established fact that
electricity usage leads to better/improved quality of life or standard of living. There
is also a close co-relation between the quantum of electricity usage and the Human
Development Index (HDI). Developed countries have a higher per capital electricity
usage as compared to developing or under-developed countries.
As evident, for Bhutan to improve the quality of life of its citizens, it is imperative to
encourage people to use electricity to carry out many of the tasks that are currently
being done using other forms of non-renewable energy. The Royal Government of
Bhutan has also acknowledged this fact and has embarked on a program to ensure
100% electrification of the country by 2013. By the end of the year, Bhutan will
probably be the first country in South Asia to have made such an achievement.
The following table, based on data from the World Bank, shows that the per capita
usage of electricity in Bhutan is way below the international average. Although,
Bhutans per capita electricity usage has increased significantly in 2012 as compared
to 2008, there is still much to be done on this front.
Table 2 : Per capita electricity consumption
World average (kWh/person)
Bhutan (kWh/person)
2008
2,858
1,609
2012
2,402
Furthermore, as per the Energy efficiency baseline study conducted by the

Department of Renewable Energy, Ministry of Economic Affairs, in 2012, only 42.6%
of the total energy needs of Bhutan is met through electricity while the balance
(57.4%) is met through other sources of non-renewable energy. As evident it is
imperative for Bhutan to promote the usage of electricity and move away from the
use of non-renewables.
It will be possible to make this move only if the electricity tariff is kept at an
affordable level so that it is accessible to most Bhutanese. Accordingly, the tariff
increase as proposed by both DGPC and BPC is not in line with the philosophy of
ensuring accessibility and affordability to encourage more usage of electricity.
2.3
FINANCIAL PERFORMANCE OF DGPC AND BPC
As per the TDR, both DGPC and BPC are allowed a very salubrious return on equity
(12% for DGPC and 10% for BPC). With these allowed returns, both the companies
made huge profit margins over the past three years of the tariff period. The following
tables show the key financial indicators of BPC and DGPC for 2010, 2011 and 2012.
Page 4 of 56
Table 3 : Key financial indicators of BPC for 2010, 2011 and 2012
All figures in million Nu.
2010
2011
2012
Total
Revenue
3,366.153
3,545.147
4,140.275
11,051.575
Profit after tax (PAT)
998.430
897.730
904.259
2,800.419
Net fixed assets
9,942.107
11,416.563 12,983.480
34,342.150
PAT/Net fixed assets
10.04%
7.86%
6.96%
8.15%
PAT/Revenue
29.66%
25.32%
21.84%
25.34%
Table 4 : Key financial indicators of DGPC for 2010, 2011 and 2012
2010
2011
2012
Total
Revenue
11,811.464
10,948.330 11,140.801
33,900.595
Profit after tax (PAT)
4,488.594
3,933.087
4,181.927
12,603.608
Net fixed assets
52,461.188
50,948.020 49,480.113 152,889.321
PAT/Net fixed assets
8.56%
7.72%
8.45%
8.24%
PAT/Revenue
38.00%
35.92%
37.54%
37.18%
The following table shows the consolidated profit margin (Profit after tax to total
revenue) for the last three years for DGPC, BPC and other private companies in the
Bhutanese economy.
Table 5 : Comparison of profit margin of some companies in Bhutan
Consolidated profit margin for
Company
three years (2010, 2011 and 2012)
Bhutan Power Corporation
25.34%
Druk Green Power Corporation
37.18%
Bhutan Carbide and Chemicals Limited
2.20%
Bhutan Ferro Alloys Limited
7.84%
Druk Wang Alloys
13.23%
Saint Gobain
-2%
Pendent Cement Authority Limited
17.16%
Lhaki Cement
10.75%
Weighted average for 26 companies
3.20%
As can be seen from the above table, the two state-run monopolies are already
outperforming other large companies operating in Bhutan currently in the context of
profit margin. It should also be remembered here that the other companies besides
BPC and DGPC are privately or publicly owned and operate under high business
and market risk conditions. These companies are considered to be representative of
the big players in the Bhutanese economy.
As evident, it can be concluded that both the power sector monopolies are
performing extremely well financially as the electricity tariff rates are very favorable
for them. The tariff rates are favorable because the allowed CoE and other financial
parameters are very high with respect to the prevailing market conditions. With the
level of profits that DGPC and BPC are making, it is felt that there is actually no need
for an electricity tariff revision.
Page 5 of 56
With the proposed revision made by the two licensees, the financial indicators as
shown above will only become better. This will however, be at the cost of the rest of
the economy, wherein a lot of other industries and businesses will close shop.
Based on the financial performance of the two licensees over the last three years vis-vis the other companies in Bhutan, it is felt that the allowed return and other
parameters as outlined in the TDR need to be reviewed and lowered keeping in view
the prevailing conditions in the Bhutanese economy.
2.4
VALUE ADDITION OF THE INDUSTRIAL SECTOR TO THE ECONOMY
The general perception among the public as well as many policy makers in the
Government establishment is that electricity rates are subsidized for industries in
general and HV industries in particular. There is no subsidy for HV industries with
regard to electricity tariff after July 2011 in line with clause 7.2.8 of the Economic
Development Policy (EDP) 2010 which states that the tariff policy shall gradually
remove subsidies from high voltage (HV) by 2011. Since the intention of the RGoB is to
promote micro, small and medium industries, subsidies for medium voltage (MV) industrial
consumers shall continue till 2020.
Accordingly, the following table shows the level of subsidies that were approved for
the various customer categories for the last tariff period. This is as per BEAs Tariff
review report for BPC (September 2010, Clause 4.4, Table 56 on page 37 of the
report).
Table 6 : Subsidy approved for the various customer categories for the last tariff
period
Customer category
2010/2011
2011/2012
2012/2013
% of subsidy
LV (million Nu.)
943.878
943.878
943.878
88.50%
MV (million Nu.)
122.058
122.058
122.058
11.50%
HV (million Nu.)
93.607
Total (million Nu.)
1,159.54
1,065.94
1,065.94
100%
Accordingly, it can be seen that only 11.5% of the total quantum of the subsidy
provided or Nu. 122.058 million was approved for MV customers for the last tariff
period with a large proportion of subsidy being apportioned to the LV category.
Most of the MV customers also pertain to hydropower projects that are currently
under construction and are not necessarily MV industries.
To dispel the general notion that it would be better to export electricity to India
rather than sell it to HV industries in Bhutan, an analysis in terms of the revenue
earned from both the options was conducted, which is summarized in the following
table.
Table 7 : Analysis of revenue earning (energy sales to HV industries vs. export)
Particulars
2010
2011
2012
Number of HV industries
14
14
14
Energy sales to HV industries (GWh)
1,159.20 1,170.64 1,267.25
Revenue from energy sales to HV industries as per
1,935.62 2,012.73 2,254.13
BPCs annual reports (million Nu.)
Weighted average export price to India (Nu/kWh)
1.86
1.86
1.98
Opportunity cost by not exporting to India (million
2,156.11 2,177.39 2,509.15
Nu.)
Page 6 of 56
Difference (revenue from HV sales and opportunity

cost) (million Nu.)
Taxes paid by HV industries (million Nu.) (Only
BIT/CIT)
Overall difference (revenue from HV sales and
opportunity cost adjusted for taxes paid by
companies) (million Nu.)
220.49
164.66
457.13
438.31
236.65
273.65
255.02
Note : Taxes paid by some companies for 2012 was not available and therefore the tax figure has not
been shown.
As can be seen from the above table, it makes more financial sense to sell electricity
to the HV industries in Bhutan rather than to export it to India as it earns much more
revenue for the Bhutanese economy. This is also considering only Business Income
Tax/Corporate Income Tax paid by these companies without taking into account
other aspects such as Bhutan Sales Tax (BST) that is paid when raw materials are
imported by these industries, employment that is generated, other kick-on effects it
has on the economy, Personal Income Tax (PIT) paid by the employees working in
these companies, etc.
Furthermore, based on the data available for only nine HV industries for 2009, 2010
and 2011, the following table shows the INR earned by these industries.
Table 8 : INR earned by 9 HV industries for 2009, 2010 and 2011
Particulars
Amount (million INR)
Total INR earned (sale of finished or intermediary
24,300
goods)
Total INR spent (import of raw materials)
14,000
Total INR retained over three years
10,300
Total INR retained annually
3,433
It should be noted here that even if the data for 2012 is considered for the INR
earnings that would have accrued from sale of the electricity to India (assuming that
it was not sold to HV industries in Bhutan), INR 2,509.150 million would have been
earned by the economy while the above table shows that INR 3,430 million was
earned by HV industries (only 9 HV industries have been considered as opposed to
14 operating HV industries as information was available only for 9 HV industries).
These 9 HV industries also provided direct jobs to over 1,674 employees (1,353
Bhutanese and 321 non-Bhutanese). As a thumb rule and based on studies conducted
on labour and employment, it is an established fact that for every one direct job, a
minimum of about 4 indirect jobs are created. Accordingly, based on the available
data for 9 HV industries, a total of 6,765 jobs (1,353 direct and 5,412 indirect jobs)
were created for Bhutanese citizens by these industries.
Furthermore, based on the data available for 12 MV industries, over 1,294 jobs (880
Bhutanese and 414 non-Bhutanese) were created. Accordingly, a total of 4,400 jobs
(880 direct and 3,520 indirect jobs) were created for Bhutanese citizens by these 12
MV industries.
Taking into account the 9 HV and 12 MV industries, a total of 11,165 jobs (2,233
direct and 8,932 indirect jobs) were created for Bhutanese citizens by these 21
industries.
Page 7 of 56
Also based on the data available for 24 industries (mix of HV and MV industries) for
2009, 2010 and 2011, the following table shows the INR earned by these industries.
Table 9 : INR earned by 24 industries (HV and MV) for 2009, 2010 and 2011
Particulars
Amount (million INR)
Total INR earned (sale of finished or intermediary
29,300
goods)
Total INR spent (import of raw materials)
17,500
Total INR retained over three years
11,800
Total INR retained annually
3,933
The above table shows that the 24 industries brought in a revenue of INR 3,933
million every year for 2009, 2010 and 2011.
Also based on the data obtained from the Department of Revenue and Customs for
2012 for 50 industries based in the Phuentsholing region, a total of Nu. 1,190.385
million was paid by these industries to the Royal Government as duties and taxes
(Nu. 539.766 million as Bhutan Sales Tax, Nu. 342.761 million as Business Income
Tax/Corporate Income Tax and Nu. 307.858 million as others).
As can be seen from the analysis outlined above, promoting industries is a viable
option for the Bhutanese economy as it translates into more revenue, more INR
earnings and more jobs being created despite the fact that a lot of other intangible
benefits have not been accounted for. Quantifying these intangible benefits results in
an even stronger case for promoting these industries and keeping the electricity tariff
rates relatively low.
With the proposed increase in the electricity tariff as made by DGPC and BPC, many
industries will be forced to shut down as they will be simply unviable, given that the
magnitude of increase proposed is just too much (38% for HV and 99% for MV). The
detrimental impact this will have on other smaller businesses such as hotels,
institutes, cottage industries, etc., is also obvious as the proposed electricity tariff
increase for this category is 103%. This will also come at a time when the business
environment is not too good with the liquidity crunch and the INR shortage that the
Bhutanese economy is currently facing.
Closure of many businesses, both small and large, as a result of the electricity tariff
increase will lead to a loss in revenue for the Government in the form of taxes, loss of
jobs, loss of INR earnings, etc. As a result of the loss of jobs and income for the
people currently employed by these industries, a lot of other unintended social ills
such as an increase in crime rates, increase in un-employment rates, etc, will be an
obvious fall out.
BPC and DGPCs envisaged revenue stream will also be affected negatively in the
event businesses close as it will result in a situation where the energy sales target
cannot be met by BPC. Although the energy can be wheeled for export, allowing BPC
to make some earnings from this front, the revenue stream will be measly compared
to energy sales as the wheeling charge is very small. Accordingly, BPC will not be
able to recover its investments made on capacity additions and system
augmentation.
Page 8 of 56
2.5
0.5
800
700
600
500
400
300
200
100
0
1982 to 1983
1983 to 1984
1984 to 1985
1985 to 1986
1986 to 1987
1987 to 1988
1988 to 1989
1989 to 1990
1990 to 1991
1991 to 1992
1992 to 1993
1993 to 1994
1994 to 1995
1 April 1995 to 30 June
1 July 1995 to 30 June
1 July 1997 to 31
1 January 2000 to 30
1 July 2002 to 30
1 July 2004 to 31 July
1 August 2005 to 30
1 August 2010 to 30th
1982 to 1983
1983 to 1984
1984 to 1985
1985 to 1986
1986 to 1987
1987 to 1988
1988 to 1989
1989 to 1990
1990 to 1991
1991 to 1992
1992 to 1993
1993 to 1994
1994 to 1995
1 July 1995 to 30 June 1996
1 July 1996 to 30 June 1997
1 July 1997 to 31
1 January 2000 to 30 June
1 July 2001 to 30 June 2002
1 July 2002 to 30
1 January 2003 to 30 June
1 July 2004 to 31 July 2005
1 August 2005 to 30 June
1 July 2006 to 30 June 2007
1 July 2007 to 30 June 2008
1 July 2008 to 30 June 2009
1 July 2009 to 30 June 2010
1 July 2011 to 30 June 2012
1 July 2012 to 30 June 2013
1 July 2013 to 30 June 2014
HISTORICAL TARIFF RATES
If the historical trend of increase in the electricity tariff is analyzed from 1982
onwards, it can be seen that the increase in the rates was very gradual. This was done
so as to avoid a sudden rate shock for customers. As can be seen from the following
charts, the tariff increase as proposed by BPC is not keeping in line with the historical
trend of increase for both energy as well as demand charge.
Energy charge for MV customers

(Nu/kWh)
2.5
1.5
0.7 0.7 0.7 0.7 0.7

0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4

0.5 0.5 0.5
0.6
0.7
0.8 0.8
0.95 0.95
1.1
1.25 1.3
1.43
1.55
1.79
1.63 1.71
1.99
Demand charge for MV customers

(Nu/kW/month)
760
95 105115
54 54 54 65 75 85
Page 9 of 56
Energy charge for HV customers

(Nu/kWh)
2.5
1.99
2
1.5
0.5
0
0.7 0.7 0.7 0.7 0.7

0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4
0.5 0.5 0.5
0.6
0.7
0.8 0.8
0.9 0.9
1.05
1.4
1.511.511.541.54
1982 to 1983
1983 to 1984
1984 to 1985
1985 to 1986
1986 to 1987
1987 to 1988
1988 to 1989
1989 to 1990
1990 to 1991
1991 to 1992
1992 to 1993
1993 to 1994
1994 to 1995
1 July 1997 to 31
1 July 2002 to 30
1 July 2004 to 31 July 2005
1 August 2005 to 30 June
1.2 1.29
Demand charge for HV customers

(Nu/kW/month)
471
85 85 105105
54 54 54 65 75
1982 to 1983
1983 to 1984
1984 to 1985
1985 to 1986
1986 to 1987
1987 to 1988
1988 to 1989
1989 to 1990
1990 to 1991
1991 to 1992
1992 to 1993
1993 to 1994
1994 to 1995
1 April 1995 to 30
1 July 1997 to 31
1 July 2002 to 30
1 July 2004 to 31 July
1 August 2005 to 30
500
450
400
350
300
250
200
150
100
50
0
As can be seen from the above charts for energy charge (for both MV and HV), the
energy charge was revised by about 5-10 chetrum every year in the recent past.
However, as per the proposal made by BPC, the revision in energy rates would be
based on a pass through mechanism wherein BPC will transfer the purchase price
from DGPC to its customers. As DGPC has proposed to revise the additional energy
rates to Nu. 1.99/kWh, this will be the tariff that BPC will pass on to HV and MV
customers as energy charge.
Similarly, the demand charge was revised by about Nu. 10/kW/month every year in
the recent past. However, BPC has now proposed to revise the demand charge
drastically by as much as 644% for MV customers and 340% for HV customers. Such
an increase is simply unacceptable as it will lead to a severe rate shock for HV and
MV customers. This is also not in line with the historical rate of increase.
Page 10 of 56
3.
INTRODUCTION
This report is presented in two parts so as to address the electricity tariff revision
proposals submitted by the two licensees DGPC and BPC. The first part of the
report deals with the tariff revision proposal submitted by DGPC while the latter half
deals with that submitted by BPC.
For the purpose of reviewing the tariff revision, the Tariff Determination Regulation
(TDR) 2007 as well as the principles adopted by the BEA while reviewing the tariff
proposal for the last tariff period (August 2010 to June 2013) have been followed.
The final tariff rates for BPC however are subject to the royalty energy and additional
energy price to be charged by DGPC to BPC as well as other allowable cost structures
applicable to both DGPC and BPC. The quantum of subsidy for the various customer
categories, which will be decided and approved by the BEA and the RGoB will
determine the royalty energy price which will in turn have a bearing on the final end
user prices.
4.
DGPCs TARIFF REVISION PROPOSAL
The following section reviews the tariff revision proposal submitted by DGPC and
provides comments and counter revisions to their proposal complemented with
justifications.
4.1
PARAMETERS USED IN THE DETERMINATION OF TARIFF
The following sections explain the various parameters used in the determination of
the tariff including DGPCs assumptions as well as those allowed by BEA.
4.1.1
WEIGHTED AVERAGE COST OF CAPITAL (WACC)
The Weighted Average Cost of Capital (WACC) is a parameter that is computed as a

before tax parameter and is a function of the Gearing ratio, the Cost of Debt, the Cost
of Equity and the tax rate. The details as to how the WACC is to be computed is
outlined in section 6.6.3 of the TDR. The WACC is used for the purpose of
computation of the Return on Assets, Return of Working Capital, network costs and
also used as a discount factor to compute the present value of energy and costs.
The WACC is computed by using the following formula
4.1.1.1
Gearing Ratio
Gearing ratio is the standard ratio of debt to total fixed assets. As per the TDR, this
ratio is to be determined by the Authority and the actual gearing ratio of the licensee
(BPC or DGPC) is not to be used.
In the determination of the tariff, DGPC has used a gearing ratio of 40%, which is in
line with BEAs review for the last tariff period (August 2010 to June 2013) based on
BEAs Tariff review report (Clause 2.2.3.2 on page 3 of the report).
Page 11 of 56
Accordingly, for the purpose of reviewing the tariff revision proposal submitted by
DGPC, a gearing ratio of 40% as proposed is accepted.
4.1.1.2
Cost of Equity (CoE)
The Cost of Equity is to be determined by the Authority as per schedule C of the

TDR. A Cost of Equity of 12% (post tax) has been approved in the TDR 2007 for
generation, which is applicable to DGPC.
In the determination of the tariff, DGPC has proposed and used a CoE of 15.5%.
DGPC has justified the use of this value as the Central Electricity Regulatory
Commission (CERC) allows a post tax CoE of 15.5% for generating companies based
in India.
However, it is not appropriate and prudent to compare the power scenario in India
to that of Bhutan. The conditions prevailing in India is very different to that in
Bhutan. Firstly, as evident, India is currently experiencing a huge shortage in firm as
well as peak power requirement and it is imperative to attract players (both from the
public and private sphere) in this sector so as to overcome the shortage. The only
way to do this would be by allowing an attractive CoE such as the one being allowed
currently by the CERC.
Secondly, a relatively high CoE would be admissible for private sector investments
as the risks associated with generation of power is relatively high at least in the
Indian scenario. This is because most of the power generation in India is thermal
based with coal and gas having to be imported and accordingly subject to a lot of
price fluctuations based on international buying and selling rates. This is in line with
the generally accepted economic principle of higher risk, higher return and lower
risk, lower return. However, in Bhutans case, allowing a high CoE for a state run
monopoly with no associated market and business risks is not warranted. It is to be
noted here that the two licensees are not exposed to any form of risks as the current
tariff model is based on a cost-plus model and accordingly these companies will
never go in the red unlike their counterparts in India.
Thirdly, no equity has actually been injected by DGPC directly or for that matter
even by the RGoB or DHI (DGPCs owner) for all the existing power plants being run
by DGPC. The non-debt component of all the current hydropower plants which
should technically have been injected as an owners equity (by DGPC or RGoB/DHI)
has actually been funded through a grant by the GoI to the RGoB. According, it
would not be prudent to allow such a high CoE as proposed. Although, DGPC has
claimed that RGoB has passed on all the grants as equity to DHI, this is only a
nominal claim and DHI has not compensated the RGoB for this passed on equity by
way of a cash payout at the time of transfer.
Furthermore, while reviewing the tariff revision proposal submitted by DGPC for the
last tariff period (August 2010 to June 2013), BEA approved a CoE of 6% for DGPC as
per BEAs Tariff review report (September 2010, Clause 2.2.3.4 on page 4 of the
report). Accordingly, for the purpose of reviewing the tariff revision proposal
submitted by DGPC, a cost of equity of 6% is acceptable.
Page 12 of 56
4.1.1.3
Cost of Debt (CoD)
The Cost of Debt (CoD) is the weighted average interest rate of DGPCs loans
including any major loans that have been fully redeemed, with suitable allowance
made for currency risk of any loans not made in local currency.
The following table shows the status of debt of DGPC as of 31 December 2012 as per
the audited financial statements for 2012.
Table 10 : Loan balance of DGPC as of 31 December 2012
Loan particulars
Interest rate Loan balance 31.12.2012 (Nu.)
BHP Lower Stage
6.00%
1,319,098,352.68
BHP Upper Stage
6.00%
460,200,000.00
KHP
10.75%
1,059,857,179.24
THP
9.00%
12,420,266,369.87
CHP
5.00%
Total
15,259,421,901.79
CoD (weighted average)
8.77%
While there is no way to verify the information on debt status provided by DGPC,
these figures have been subject to auditing as per the Royal Audit Authoritys norms.
Therefore, the figures as presented by DGPC have been used for the computation of
CoD.
Furthermore, it has been observed that the loan balance for 2012 has been used to
compute the CoD and the corresponding WACC for the entire duration of the tariff
period. As evident, this approach has a fallacy as the current CoD has been used to
find the WACC for the future. Accordingly, it is recommended that the loan
repayment schedule be used to project the loan balance for 2013, 2014 and 2015 so as
arrive at the CoD for the proposed tariff period. Accordingly, the WACC for 2013,
2014 and 2015 (calculated from the CoD for each year) should be calculated to find
out the consolidated WACC for the proposed tariff period.
As evident, this methodology will result in a much lower CoD for the tariff period as
compared to the one proposed by DGPC. For, eg, the CoD for 2009 was 8.85% as per
clause 2.2.3.3 on page 3 of the BEAs Tariff review report (September 2010) while the
CoD for 2012 is 8.77%. Accordingly this will result in a much lower WACC for the
tariff period as compared to DGPCs proposal.
By comparing the outstanding debt in 2009 and 2012, the outstanding debt for the
proposed tariff period and the consolidated CoD has been computed and is shown in
the following table. However, these figures need to be verified based on the actual
data to be provided by DGPC.
Table 11 : DGPCs calculated outstanding debt and Cost of Debt for the proposed tariff
period (2013 to 2015)
Loan
Interest
Loan balance
Loan balance
Loan balance
balance 2015
rate
2012 (Nu.)
2013 (Nu.)
2014 (Nu.)
(Nu.)
BHP Lower
6.00%
1,319,098,352
1,209,173,489
1,099,248,627
989,323,764
Stage
BHP Upper
6.00%
460,200,000
424,800,000
389,400,000
354,000,000
Stage
Page 13 of 56
KHP
10.75%
1,059,857,179
766,809,572
473,761,965
180,714,358
THP
9.00%
12,420,266,369
10,802,355,159
9,184,443,949
7,566,532,739
CHP
5.00%
15,259,421,901
13,203,138,222
11,146,854,542
9,090,570,862
8.77%
8.73%
8.67%
8.59%
Total
CoD (year wise)
CoD (consolidated)
8.67%
As computed in the above table, a CoD of 8.67% is more acceptable than the
proposed rate of 8.77%. This value is however subject to factoring in the actual loan
repayment schedule for 2013, 2014 and 2015.
4.1.1.4
Tax rate
The tax rate is the prevailing rate, which DGPC has proposed as 30% in line with
Section 45, Chapter 49 of the Income Tax Act of the Kingdom of Bhutan 2001.
This tax rate of 30% as proposed by DGPC has been reviewed and is acceptable.
4.1.1.5
Weighted Average Cost of Capital (WACC)
Based on the review of the various parameters required for the computation of
WACC as discussed in the preceding sections, the following table shows the
accepted values of these parameters and the corresponding value of WACC
computed for the proposed tariff period.
Table 12 : Recommended parameters for WACC
Gearing ratio
Cost of equity (post tax)
Cost of debt
Tax rate
WACC
40%
6%
8.67%
30%
8.61%
However, as highlighted earlier, the actual WACC for the tariff period (2013 to 2015)
will have to be verified based on the loan repayment schedules to be provided by
DGPC. It is recommended that DGPC be asked to submit the status of debt for 2013,
2014 and 2015 (based on the loan repayment schedule) to compute the CoD and the
WACC for each year of the tariff period. The consolidated WACC thus calculated for
the tariff period has to replace the value of 8.61% that has been assumed.
4.1.2
OPERATION AND MAINTENANCE COST
An O&M allowance of Nu. 1,156 million has been proposed by DGPC in the tariff
model. This is the historical O&M costs for the last three years adjusted for actual
inflation rates for the past (9.1%, 8.45% and 9.54% for 2010, 2011 and 2012
respectively which is in line with the figures published by the National Statistics
Bureau). This is well below the benchmark O&M cost of Nu. 1,651.50 million as
prescribed by BEA in the TDR as per the Current Replacement Cost (CRC)
methodology.
Page 14 of 56
However, in accordance with clause 3.2.2 on page 14 of the BEAs Tariff review
report (September 2010), which was used for the approval of DGPCs tariff revision
for the last tariff period (August 2010 to June 2013), BEA did not allow costs related
to royalty energy payments, donations & community welfare expenses, income from
rent & hire charges, insurance costs & corporate office expenses to be included in the
O&M costs of DGPC for the last tariff period. These costs need to be deducted from
the overall O&M costs incurred by DGPC for 2010 to 2012 while computing the
average O&M costs to be used as a benchmark cost. After analyzing DGPCs annual
financial statements for 2010 and 2011, the following deductible costs were
ascertained. It is to be noted here that the detailed break-up of the costs in the
Schedules of the financial statements for 2012 were not available for review.
Table 13 : Actual O&M costs incurred by DGPC for 2010, 2011 and 2012
Actual O&M expenses
2010
2011
2012
Employee cost
530.58
608.14
677.39
O&M cost
302.93
369.41
333.53
Administration and other expenses
126.38
115.47
136.27
Total
959.890
1,093.020
1,147.190
Average O&M costs
1,066.700
Deductions to be made
11.812
Donations
16.195
15.598
4.758
Community welfare expenses
14.105
13.807
13.660
Other income
Insurance
Regulatory fees
Total deductions
30.675
30.002
29.258
Final O&M expenses after adjustment
929.215
1,063.018
1,117.932
Average O&M costs after adjustment
1,036.722
However, as most of the expenses were not available as can be seen from the above
table, the computed average O&M expenses (for data that was available) has been
used for the purpose of reviewing the tariff. Accordingly, an average O&M
allowance of Nu. 1,123.404 million (Nu. 1,036.722 million adjusted for actual inflation
rates for the past) has been assumed for the purpose of determining the tariff.
However, it is recommended that the detailed breakup of O&M costs be made
available by DGPC for the purpose of enabling the deduction of inadmissible costs
from the average O&M benchmark costs.
4.1.3
OPERATION AND MAINTENANCE EFFICIENCY GAINS
As per clause 6.3.2 of the TDR, an O&M efficiency gain is to the used for the purpose
of determining the tariff rates. As per the BEAs approval for the last tariff period
(August 2010 to June 2013) based on BEAs Tariff review report (September 2010,
clause 3.2.2.7 on page 17), an O&M efficiency gain of 2% was approved and used.
As per DGPCs tariff revision proposal, an efficiency gain of 0% has been used for
determining the tariff rates.
However, for the purpose of reviewing the tariff revision proposal submitted by
DGPC, an O&M efficiency gain of 2% has been used.
Page 15 of 56
4.1.4
REGULATORY FEES
DGPC has not proposed for any regulatory fees for the tariff period as it has already
been included in the O&M costs. However, as it was not possible to ascertain this, it
is felt that this cost needs to be removed from the O&M costs and booked separately
for the purpose of transparency.
It is recommended that the regulatory fees paid be made available by DGPC for the
purpose of deducting them from the average O&M benchmark costs and booking
this separately. As per the Regulatory Fees Regulation 2006, a regulatory fee of
0.15% of revenues is to be paid by DGPC annually.
4.1.5
INFLATION
Inflation is used for the purpose of estimating the following three parameters in the
tariff determination model
(i)
(ii)
(iii)
O&M expenses for the subsequent years of the tariff period based on a
benchmark for the base year of 2012
Inventories for the subsequent years of the tariff period based on a
Cost escalation in the Capital expenditure
Accordingly, DGPC has used an average inflation figure of 9.03% based on the
historical inflation figures for the past (2010 to 2012) as published by the National
Statistics Bureau.
Table 14 : Actual inflation rates for 2010, 2011 and 2012 as per the NSB
2010
2011
2012
9.10%
8.45%
9.54%
Inflation (%)
Average
9.03%
However, it was felt that a more realistic figure should be used based on the forecast
made by the International Monetary Fund (IMF). Accordingly, the following figures
have been used for the purpose of reviewing the tariff proposal.
Table 15 : Proposed inflation rates for 2013, 2014 and 2015 as per IMF forecasts
Average
2013
2014
2015
7.81%
6.45%
6.45%
6.9%
Inflation (%)
4.1.6
DEPRECIATION
The depreciation rates have been calculated based on the prescribed useful service
life of the various assets classes and gross & net asset values as per the investment
schedule planned during the tariff period (2013 to 2016).
Accordingly, the annual deprecation amounts have been computed and reviewed
based on the proposed capital investments, existing gross asset base and the allowed
depreciation rates as per the useful service life of the asset prescribed in the TDR.
Page 16 of 56
4.1.7
INVESTMENT PLAN
In line with the gross value of assets approved for the last tariff period (August 2010
to June 2013) based on BEAs Tariff review report (September 2010, clause 3.1.2 on
page 8), some asset classes which are not owned directly by DGPC have to be
deducted from DGPCs declared gross asset value for 2012 for the purpose of
estimating the depreciation value and the return of assets for the proposed tariff
period, which have a bearing on the final tariff rates. In 2009, the gross value of these
assets was Nu. 1,263.64 million. Accordingly, based on the type of assets included in
this amount, the depreciation based on the life of the assets has to be computed to
find out the net value of these assets in 2013, 2014 and 2015.
Furthermore, the following table shows the asset capitalization schedule of DGPC for
the last tariff period (2010 to 2012). As evident, DGPC was able to meet only 59% of
its proposed asset capitalization figures and accordingly, this factor needs to be
incorporated while approving the asset capitalization schedule for the proposed
tariff period.
Table 16 : DGPCs asset capitalization schedule (proposed, approved and actual
for the last tariff period)
2010
2011
2012
Total
Proposed capitalization
1,039.10
1,132.04
1,653.96
3,825.10
Approved capitalization
639.70
577.77
945.50
2,162.97
Actual capitalization
779.70
678.89
798.93
2,257.52
% variation (proposed vs.
-24.96%
-40.03%
-51.70%
-40.98%
actual)
DGPC has proposed to capitalize Nu. 2,926.190 million worth of assets in 2013, 2014
and 2015. However keeping in view the past historical trend, it is proposed that only
59% or Nu. 1,726.45 million worth of assets be considered for capitalization for the
proposed tariff period.
It is also proposed that since it is very difficult or next to impossible to come up with
the exact figures for the quantum of assets that will be capitalized over the next three
years, a figure based on historical trend be assumed for the purpose of arriving at the
tariff rates. However, this can be adjusted in the next tariff period once the actual
capitalization figures are available for the past period.
4.1.8
ARREARS
For the purpose of computing the return on working capital, the arrears in days is
required. Accordingly, DGPC has proposed an arrear of 57 days which is in line with
the arrears as approved for the last tariff period (August 2010 to June 2013) based on
BEAs Tariff review report (September 2010, Table 26 on page 19).
This parameter, as proposed, is acceptable.
4.1.9
DESIGN ENERGY
The design energy is defined in the TDR as the total energy generated in a 90%
dependable year with 95% installed capacity of the station.
Page 17 of 56
The design energy as proposed by DGPC is based on 85% of the average actual
annual generation of 6,934.5 GWh of energy that has been achieved from 2003 to
2012. Only 85% of this has been proposed so as to account and adjust for the royalty
energy volume. However this is not in line with the TDR - 2007 as well as the
approval for the last tariff period (August 2010 to June 2013) based on BEAs Tariff
review report (September 2010, clause 3.4.2 on page 22).
The design energy that has been assumed for the purpose of this review is as per the
design energy that was approved by the BEA for the last tariff period. Furthermore,
93 GWh of energy from Tsibjalumchhu diversion scheme in Chukha has been added
from 2015 onwards to the approved values of design energy for the last tariff period.
The following table shows the design energy that has been reviewed and considered
for the purpose of determining the tariff rates.
Table 17 : Recommended design energy volume for the proposed tariff period
2013
2014
2015
6,387.120 6,387.120 6,480.120
Design energy (GWh)
4.1.10
AUXILLARY CONSUMPTION AND PLANT AVAILIBILITY
DGPC has proposed an auxiliary consumption of 1.2% and power plant availability
of 98% as allowed by the BEA (schedule D of the TDR) although DGPCs actual data
for the past three years is 1.28% and 97.66% for auxiliary consumption and power
plant availability respectively.
The values as proposed by DGPC are accepted.
4.1.11
ANNUAL ENERGY GENERATION
The annual energy generation that has been assumed for the purpose of determining
the tariff rates has been obtained from the annual design energy after adjusting it for
auxiliary consumption of 1.2% and plant availability of 98%. The following table
shows the expected annual energy volume that has been considered to calculate the
tariff for the additional energy.
Table 18 : Recommended annual energy volume for the proposed tariff period
2013
2014
2015
6,387.120 6,387.120 6,480.120
Design energy (GWh)
Annual energy volume after accounting for
auxiliary consumption and plant availability
6,184.265 6,184.265 6,274.311
(GWh)
4.1.12
ROYALTY ENERGY
DGPC has proposed a royalty energy proportion of 15% of average annual energy
forecast after adjusting for auxiliary consumption. This is in line with the
methodology approved for the last tariff period (August 2010 to June 2013) based on
BEAs Tariff Review Report (September 2010, Clause 4.1.1 page 23). Accordingly, this
proposal is acceptable. The following table shows the quantum of royalty energy that
has been considered for the tariff period.
Page 18 of 56
Table 19 : Recommended royalty energy volume for the proposed tariff period
2013
2014
2015
6,863.110 6,894.110 6,956.110
Energy generation forecast (GWh)
Royalty energy volume after accounting for
1,017.113 1,021.707 1,030.896
auxiliary consumption (GWh)
4.2
FINAL TARIFF STRUCTURE
Based on the parameters that have been proposed by DGPC for the purpose of
computing the tariff, a generation tariff of Nu. 1.99/kWh for the additional energy
amount has been proposed by DGPC for the period July 2013 to June 2015.
However, based on the review carried out on the various parameters that were
assumed by DGPC for the purpose of determining the tariff, the recommended rate
for the additional energy has been computed as Nu. 1.19/kWh. Accordingly, this
means that the final approved rate for the additional energy should not exceed this
computed value as a lot of other cost structures which need to be deleted have not
been done so due to lack of proper information.
The following tables shows the cost structure and the values used in the
determination of the final additional energy rate.
Table 20 : Maximum total cost of supply for the proposed tariff period
2013
2014
Operation and Maintenance (million Nu.)
1,182.890
1,252.939
Depreciation (million Nu.)
2,301.845
2,341.626
Return on Assets (million Nu.)
3,784.596
3,633.823
Return on Working Capital (million Nu.)
143.757
146.381
Total Cost (million Nu.)
7,413.087
7,374.769
Table 21 : Maximum average cost of supply for additional energy
2013
2014
Discounted Total Cost (million Nu.)
6,825.365 13,077.119
Discounted Energy (GWh)
5,693.966 10,936.504
Average additional energy cost (Nu/kWh)
1.19
2015
1,323.703
2,380.762
3,493.779
149.369
7,347.614
2015
18,812.029
15,833.687
The rate for the royalty energy depends on the quantum of subsidy that is
determined and approved by the RGoB. However, it is recommended that the
royalty energy rate be kept at free or Nu. 0.0/kWh in line with clause 7.2.9 of the
Economic Development Policy 2010 (EDP) which states that Recognizing
hydropower as a national resource, it shall be provided at affordable rates to reduce nonrenewable energy use. The generating companies shall provide 15% of the total power
generation as free royalty energy from medium, large and mega power generating companies
to the Royal Government.
Accordingly, based on this clause of the EDP, the quantum of subsidy required to be
provided is as shown in the following table.
Page 19 of 56
Table 22 : Average cost of supply for royalty energy

2013
Discounted Subsidy amount (million Nu.)
1,116.271
Discounted Royalty energy (GWh)
936.474
Average Royalty Price
0.00
4.3
2014
2,148.676
1,802.598
Nu/kWh
2015
3,107.765
2,607.226
RECOMMENDATIONS
While reviewing the tariff revision proposal made by DGPC, the following issues
were encountered which would require to be looked at in greater detail and needs to
be addressed in a holistic manner
(i)
The current methodology being used by BEA for determining the generation
tariff is based on a cost-plus model applicable for a short time duration (3
years). As evident, DGPCs plants have been constructed with about 60-70%
of debt made available by the Government of India/Austria. The loan
repayment schedule is for 12 years or more after which time the debt is
redeemed leading to a drastic reduction in the cost of debt, the WACC and
accordingly the tariff. As the life of the plant is assumed to be for about 35
years (as per CERC regulations), this current tariff determination
methodology will result in very high tariffs for the initial 12 years or so of
the plant life with a drastic drop in the rates after the loans are redeemed.
Accordingly, such a methodology leads to a very wide variation in prices
over the plant life. It is recommended that a pricing methodology similar to
the one adopted for determining the tariff for export of power to India (done
inter-governmentally between the GoI and the RGoB) be adopted at least for
generation licensees. Such a revised methodology will also provide end
users and investors a clear price path (short, medium and long term) in
terms of the generation prices (and accordingly the end user prices) so as to
enable them to make prudent investment decisions. In the current model,
investors are uncertain of the electricity prices in the middle and long term.
(ii)
It is recommended that the loan repayment schedule be used to project the

loan balance for 2013, 2014 and 2015 so as arrive at the CoD for the proposed
tariff period. Accordingly, the WACC for 2013, 2014 and 2015 (calculated
from the CoD for each year) should be calculated to find out the
consolidated WACC for the proposed tariff period. It is recommended that
DGPC be asked to submit the status of debt for 2013, 2014 and 2015 (based
on the loan repayment schedule) to compute the CoD and the WACC for
each year of the proposed tariff period.
(iii)
As per the review done by BEA on the tariff proposal submitted by DGPC
for the last tariff (August 2010 to June 2013), certain costs related to royalty
energy payments, donations & community welfare expenses, income from
rent & hire charges, insurance costs & corporate office expenses were
excluded from the overall actual O&M costs incurred by DGPC.
Accordingly, these costs also need to be deducted from the overall O&M
costs incurred by DGPC for 2010 to 2012 while computing the average O&M
costs to be used as a benchmark cost for the proposed tariff period.
However, as most of these expenses were not available, it is recommended
that these costs be made available by DGPC for the purpose of deducting
them from the average O&M benchmark costs.
Page 20 of 56
(iv)
It is recommended that the regulatory fees paid be made available by DGPC

for the purpose of deducting them from the average O&M benchmark costs
and booking this separately (without factoring for inflation as done if
clubbed with O&M costs).
(v)
It is recommended that DGPCs assets be reviewed more closely as some

asset classes which are not owned directly by DGPC have to be deducted
from DGPCs declared gross asset value for 2012 for the purpose of
estimating the depreciation value and the return on assets for the proposed
tariff period, which have a bearing on the final tariff rates. Furthermore, as
DGPC has not been able to meet its proposed asset capitalization figures for
the last tariff period (proposed vs. realized), an appropriate asset
performance factor needs to be incorporated while approving the asset
capitalization schedule for the proposed tariff period. It is recommended
that the historic trend be used for this purpose with appropriate
adjustments made in the next tariff period.
(vi)
It is recommended that a more transparent and open model be developed

for the purpose of determining the quantum of subsidy to be allocated to the
various customer categories so as to determine the royalty energy rates. As
of now, it is determined by the Minister of the Ministry of Economic Affairs
as per the Electricity Act but nonetheless it is felt that a more robust
methodology be developed so that everyone is aware of the basis for the
application of the subsidy amount.
(vii)
The current generation price determination model does not take into
consideration the export energy prices and the quantum of energy that is
exported. These parameters have a big impact on the revenue streams for
the DGPC (and thereby the price that DGPC can charge to BPC) and will
also have a bearing on the quantum of subsidy that can be provided to the
various customer categories. As evident, the generation price for the
quantum of energy that is exported is also taken into account in the current
model while determining the tariff for the additional energy but the benefits
that accrue from the proceeds of the export sales do not feature in the same
model. In effect what this means is that the cost to generate the export
energy is being paid by domestic customers but the benefits arising from the
export sales are not given to domestic customers, which is not fair and
transparent. Incorporation of these parameters into the tariff determination
model needs to be looked into so as to build a more robust, acceptable and
transparent model.
(viii)
The benchmark value for estimating the allowable O&M expenses using the
Current Replacement Cost (CRC) methodology as prescribed in the TDR
needs to be reviewed and revised. It seems in-appropriate to have double
standards in the application of the methodology as outlined in the TDR (use
of certain criteria only when it suits the requirement).
(ix)
With the current model between the Royal Government of Bhutan and the
Government of India on the revision of the energy sale price to India
(increase by 10% every 5 years until the loan repayment schedule and an
increase by 5% every 5 years after the loan is redeemed), the revenue
streams will increase steadily for DGPC whenever the export tariff is
increased. For 2012, the overall CoE for DGPC was already 10.88% and with
Page 21 of 56
the revision of the export tariff for Tala and Kurichhu scheduled for
December 2016 (and four other plants which are currently under
construction coming online), this will increase even further. This will mean
that there will come a time when the CoE will exceed the allowable 12% as
outlined in the TDR. Accordingly, it is felt that this needs to be considered
while approving the tariff in the initial years itself so that DGPC does not
exceed the allowable CoE over the life of the generating plants.
(x)
The allowable CoE of 12% for DGPC as per Schedule C of the TDR seems to
be too high keeping in view the corresponding returns that most companies
in Bhutan are currently making. It also needs to be borne in mind that these
companies are operating in a risky environment as they are exposed to
market and business risks. They also operate in a competitive and free
market environment while DGPC is a monopoly and is not subjected to any
risks as the tariff mechanism is a cost plus model allowing DGPC to recover
all costs and make a profit margin also. Allowing such a high CoE to DGPC
translates into a high tariff rate charged by BPC also resulting in many
industries being unviable. Accordingly, making a lot of other companies
unviable for the benefit of one company does not seem to be a good option
for the economy. It is recommended that the allowable CoE for DGPC be
reviewed and lowered to a more reasonable and acceptable figure.
4.4
CONCLUSION
The review conducted in this report on the proposal made by DGPC has been done
so in line with the TDR and BEAs Tariff Review Report (September 2010). Based on
the review of the proposal made by DGPC to revise the generation tariff, it has been
found that the values assumed for many of the parameters used to determine the
final tariff rates are not admissible as they are not in line with generally accepted
principles or the basis that was used and approved by the BEA while reviewing the
tariff proposal for the last tariff period (August 2010 to June 2013).
The following table shows the various parameters used for determining the tariff
rates that were reviewed and revised.
Table 23 : Summary of parameters assumed by DGPC and recommended values
Reviewed and
Parameter
Proposed by DGPC
recommended
Gearing ratio (%)
40%
40%
Cost of Debt (%)
8.77%
8.67%
Cost of Equity (%)
15.5%
6%
Benchmark O& M values (%)
1.5%
1.5%
Benchmark O&M values (absolute
Nu. 1,123.404
Nu. 1,156 million
amount in million Nu.)
million (maximum)
O&M efficiency gain (%)
0%
2%
Inflation (%)
9.03%
6.9%
59% of proposed
Asset performance factor
value
As per the values
85% of average actual
Design energy (GWh)
approved for the last
generation
tariff period
Page 22 of 56
Based on the review carried out on the proposal submitted by DGPC to BEA, the
recommended rate for the additional energy has been computed as not more than
Nu. 1.19/kWh while the rate for the royalty energy is recommended to be passed on
to BPC on a free basis.
Page 23 of 56
5.
BPCS TARIFF REVISION PROPOSAL
The following section covers the tariff revision proposal as submitted by BPC as well
as comments and counter revisions to their proposal along with justifications.
5.1
STRUCTURAL CHANGES IN THE TARIFF PROPOSAL
As compared to the tariff structure that is currently in place or was in the past, the
tariff revision proposal that has been made by BPC has some major changes and
digresses in some key aspects. The following four major changes have been proposed
in this context (i)
(ii)
(iii)
(iv)
Demand charge for MV and HV customers to be based on apparent power

(kVA or MVA) rather than on active power (kW or MW)
Minimum bill amount for LV customers using less than 100 kWh of energy
per month
Elimination of cross subsidy extended by specific customer categories to
others
Upward revision of miscellaneous charges
Each of these proposed changes are elaborated in greater detail in the ensuing
section.
5.1.1
DEMAND CHARGE BASED ON kVA RATHER THAN kW
Up until the current tariff revision proposal, the demand charge for MV and HV
customers has been based on the amount of active power (kW or MW) drawn by a
customer in a month. Accordingly, this billing structure does not have any incentive
for users to become efficient by means of improving on the power factor.
However, BPC has always required customers to maintain a minimum power factor
of 85% as outlined in clause 20 of the Terms and Conditions of supply of electricity for
MV and HV customers of BPC. From experience, this has been very difficult to
maintain and monitor both for BPC as well as for its customers.
Consequently, the proposed change in the tariff structure will inherently incentivize
customers to become more efficient in the utilization of electricity by means of
improving the power factor. This can be achieved by use of better equipment, use of
capacitor banks and ensuring regular & proper operation and maintenance of
electrical equipment at the customers premises.
Such a tariff mechanism will also institute a system wherein customers using
electricity efficiently will be rewarded while inefficient users will be penalized by
means of having to pay more for the usage of electricity.
It is however yet to be seen how HV and MV customers will actually benefit from
moving into this immediately. A very strong case needs to be made by BPC so as to
convince HV and MV customers of the positive impacts of such a new system. HV
and MV customers will have to make a lot of investments so as to actually see the
benefits of the new system.
The proposal as put up by BPC also does not provide adequate time for HV and MV
customers to plan and make investments so as to enhance efficiency. The change or
Page 24 of 56
increase in the demand charge should have been gradual and staggered as it will not
be possible for HV and MV customers to make changes in their usage pattern,
change of equipment or installation of new equipment immediately but it would take
them at least about a year or two to do this.
It would also be desirable if BPC works very closely with the industry fraternity in
terms of hand-holding and knowledge transfer to help improve efficiency. This could
be done by conducting training programs at the factory premises, carrying out
advocacy and awareness programs, conducting case studies on some industries, etc.
After the industries are convinced and ready to move to the new billing system for
demand charges, BPC can then enforce this proposed change.
5.1.2
MINIMUM AMOUNT FOR LV CUSTOMERS
BPC has proposed that for LV customers, even if the customers monthly electricity
usage is less than 100 kWh, the customer will be charged for the entire 100 kWh.
However, if the monthly usage is greater than 100 kWh, the customer shall be
charged for the actual amount of electricity used.
The justification provided by BPC for adopting this change is to encourage effective
utilization of scarce resources and to recover part of the fixed asset costs of rural
electrification built for uplifting socio-economic conditions of the economically
disadvantaged.
However, it should be noted that if this proposal is adopted, it is going to be counterproductive and will have a detrimental impact in terms of cost of living for poor
households and will disproportionately affect those in the lower income bracket.
People who use less than 100 kWh of electricity per month are already among the
most economically disadvantaged and a lifeline block with the least tariff rate
currently exists precisely for the benefit of this group of customers.
The monthly electricity consumption of an economically disadvantaged user is
estimated to be about 73 kWh per month (see table below).
Table 24 : Estimated monthly consumption of electricity of an economically
disadvantaged user
Total energy
Hours of
Electrical appliance
Quantity
Wattage
used per day
usage per day
(kWh)
Light bulb
2
60
4
0.48
Heater
0
2000
6
0
Geyser
0
2000
2
0
TV
0
300
4
0
Boiler
0
650
3
0
Rice cooker
1
650
3
1.95
Curry cooker
0
650
3
0
Refrigerator
0
400
24
0
Daily energy usage
2.43
Monthly energy usage
72.90
Page 25 of 56
Based on this estimate, the monthly increase in the users electricity bill with the
proposed change (billing a minimum of 100 kWh of electricity irrespective of the fact
that less than this is actually used) would increase drastically from 18% to 61%
compared to his/her current monthly electricity bill as shown in the following table.
Table 25 : Estimated monthly increase in electricity bill for an economically
disadvantaged user
Tariff (Nu./kWh)
Monthly bill (Nu.)
Low Voltage
block
0-100 kWh
101-300 kWh
300+ kWh
Existing
Proposed
0.85
1.62
2.14
1.00
4.10
4.10
Existing
Tariff
Total
Increase (in Nu.)
Increase (in %)
61.97
61.97
Proposed
Tariff w/out
minimum
bill amount
72.90
72.90
10.94
18%
Proposed
Tariff with
minimum
bill amount
100.00
100.00
38.03
61%
The justification provided by BPC that the proposed change will lead to more
effective utilization of scarce resources is not warranted because such a user will be
unable to afford other appliances to increase his/her electricity consumption as the
cost becomes prohibitive. This is a well-established fact from the numerous amount
of research that has already been conducted in the past with respect to rural
electrification projects. Most beneficiaries in the rural areas already face problems in
terms of paying for the cost of internal house electrification alone after a rural
electrification activity is completed in a village, let alone purchasing an additional
appliance such as a curry cooker or a water boiler. The counter-productive nature of
this proposal lies in the real possibility that instead of leading to energy conservation,
users will keep their lights on unnecessarily as there will be no incentive for them to
switch them off given that they would pay the same amount leading up to the 100
kWh threshold.
Adopting this proposal would be highly unfair to the customer and especially to
those in the low-income bracket. It will prove to be counter-productive to the very
essence of its goal and lead to more wastage of scarce resources rather than
promotion of effective utilization.
5.1.3
ELIMINATION OF CROSS SUBSIDY
BPC has proposed that for the computation of the tariff structure for the various
customer categories, separate Weighted Average Cost of Capital (WACC) be used for
the different customer categories rather than a consolidated WACC. This is a
deviation from the provisions of the TDR (Section 6.6.3) wherein a consolidated
WACC is to be used for the determination of the tariff structure for each customer
category rather than use of separate WACCs for various customer categories.
The WACC for the various customer categories can be obtained from the Cost of
Debt (CoD) which is different for various customer categories based on apportioning
the existing amount of debt to the various customer categories based on the asset
Page 26 of 56
allocation factor as approved for the last tariff period (August 2010 to June 2013)
based on BEAs Tariff review report (September 2010, Table 54 on page 36).
As proposed by BPC, the Cost of Debt for the various customer categories and the
calculated WACC is shown below:
Table 26 : Calculated WACC for the various customer categories
Consolidated Export
HV
MV
Gearing ratio
44%
44%
44%
44%
16%
16%
16%
16%
Cost of debt
2.76%
9.43% 10.73%
1.38%
Tax rate
30%
30%
30%
30%
WACC
14.01% 16.95% 17.52% 13.41%
LV
44%
16%
1.27%
30%
13.36%
Based on the WACC computed for the various customer categories as shown in the
above table, the tariff for the various customer categories has been calculated and is
shown in the following table.
Table 27 : Tariff structure calculated based on a consolidated WACC and
individual WACC for each category (based on BPCs proposal)
Tariff structure based on
Customer
Tariff structure based on
Unit
separate WACC for various
category
a consolidated WACC
customer categories
Export
Nu/kWh
0.143
0.160
HV
Nu/kWh
2.26
2.40
MV
Nu/kWh
4.36
4.29
LV
Nu/kWh
3.40
3.29
The above tariff rates have been computed based on the tariff parameters used by
BPC and will be different if parameters as allowed by BEA are used. Furthermore,
the tariff rates shown above have been computed based on the assumption that all of
the subsidies have been apportioned only to the LV customer category, as proposed
by BPC. However, the table above is shown only to illustrate the impact of using
separate WACCs for different customer categories on the corresponding tariff
structure.
It can therefore be concluded that if a consolidated WACC is used for the
computation of the tariff for the various customer categories, the LV and MV
customer categories subsidize the HV and export category leading to higher tariff
rates for the LV and MV group.
As proposed by BPC, this methodology is acceptable as the cost structure for each
customer category is more transparent and in line with section 7 of the TDR which
states that subsidy policies will be implemented only as determined by the Minister
of the Ministry of Economic Affairs.
5.1.4
UPWARD REVISION OF MISCELLANEOUS CHARGES
The BPC has proposed an upward revision in the miscellaneous charges especially
for the following four components:
Page 27 of 56
(i)
(ii)
(iii)
(iv)
Service reconnection after disconnection for non-payment of electricity bill

Meter testing fee
Meter shifting charge
Tariff for temporary connection
The following table summarizes the existing and proposed tariff rates for these four
components:
Table 28 : Existing and proposed miscellaneous charges
Existing charges
(Nu/occasion)
Sl
Particulars
LV
LV
MV
#
single
three
and
phase
phase
HV
Service reconnection
after disconnection for
1
100
150
500
non-payment of
electricity bill
2 Meter testing fee
50
100
500
3 Meter shifting charge
100
150
500
Tariff for temporary
Same as that of regular
4
connection
connection
Proposed charges
(Nu/occasion)
LV
LV
MV
single three
and
phase phase
HV
1,000
3,000
15,000
500
1,500
3,000
500
1,500
3,000
Double of regular
connection
For the first three components, it has been proposed to revise the rates by 5 to 30 fold
(500% to 3,000%) as compared to the current rates citing justifications of encouraging
customers to pay their bill on time, recovering cost to set up a good meter testing
laboratory with qualified personnel and to avoid un-necessary shifting of meters.
It is evident that the proposed increase is simply not acceptable as the rate hike is just
too much. A more acceptable level of increase (in the order to 5-10%) would be more
acceptable. Furthermore, the justifications are not complemented with adequate
information such as the additional cost incurred by BPC and associated incidental
losses because of the current rates.
Furthermore, BPC has proposed that the tariff rate for temporary service connections
be double as compared to regular connections as such installations compromise
safety. Furthermore, BPC has also justified that if the rates are maintained at par
(between regular and temporary connections), there will be no incentive for
customers to regularize their temporary connections.
It should be pointed out here that such a tariff structure for temporary and regular
connections existed prior to the tariff revision in August 2010. However, based on
the tariff revision order issued by BEA for the last tariff period (August 2010 to June
2013) vide letter no BEA/ECO/TARIFF/2010-2011/100 dated 12 August 2010
(Section B, point 4 of the Annexure to this letter), the tariff structure for temporary
and regular connections was made the same.
The justification provided by BPC in terms of temporary connections compromising
safety is not satisfactory because the installation of safety devices such as Molded
Case Circuit Breakers (MCCB), Miniature Circuit Breakers (MCB) and Earth Leakage
Circuit Breakers (ELCB) are mandatory now while releasing service connections even
if it is temporary in nature.
Page 28 of 56
Furthermore, as per clause 9 of the Terms and Conditions of supply of electricity for LV
and LV Bulk customers of the BPC, temporary service is defined as an electricity
service connection to installations intended for removal within a period not
exceeding 2 years. BPCs justification for the lack of incentive for customers to
regularize their temporary connections is not satisfactory as the temporary
connection must be provided for a period not exceeding two years. If the temporary
connection is not regularized by the customer within this period, BPC reserves the
right to disconnect the power supply to such installations.
5.2
PARAMETERS USED IN THE DETERMINATION OF TARIFF
The following sections explain the various parameters used in the determination of
the tariff including BPCs assumptions as well as those allowed by BEA.
5.2.1
WEIGHTED AVERAGE COST OF CAPITAL (WACC)
The Weighted Average Cost of Capital (WACC) is a parameter that is computed as a

before tax parameter and is a function of the Gearing ratio, the Cost of Debt, the Cost
of Equity and the tax rate. The details as to how the WACC is to be computed is
outlined in section 6.6.3 of the TDR. The WACC is used for the purpose of
computation of the Return on Assets, Return of Working Capital, network costs and
also used as a discount factor to compute the present value of energy and costs.
The WACC is computed by using the following formula
5.2.1.1
Gearing ratio
Gearing ratio is the standard ratio of debt to total fixed assets. This ratio is to be
determined by the Authority as per the TDR and the actual gearing ratio of the
licensee (BPC or DGPC) is not to be used.
In the determination of the tariff, BPC has used a gearing ratio of 44%, which is the
actual gearing ratio as on 31 December 2012 as per its audited financial statements
for 2012 (Total debt of Nu. 5,720.467 million and a net asset block of Nu. 12,983.480
million).
However based on the tariff revision order issued by BEA for the last tariff period
(August 2010 to June 2013) vide letter no BEA/ECO/TARIFF/2010-2011/100 dated
12 August 2010 (Annexure II, point 6 of this letter), a gearing ratio of 40%was used
and approved.
Accordingly, for the purpose of reviewing the tariff revision proposal submitted by
BPC, a gearing ratio of 40% would be appropriate.
Page 29 of 56
5.2.1.2
Cost of Equity (CoE)
The Cost of Equity is to be determined by the Authority as per schedule C of the

TDR. A Cost of Equity of 10% (post tax) has been approved in the TDR 2007 for
transmission and distribution, which is applicable to BPC.
In the determination of the tariff, BPC has used a CoE of 16%. BPC has justified the
use of this value as the Central Electricity Regulatory Commission (CERC) allows a
post tax CoE of 15.5%.
It is felt that it is not appropriate to equate the power scenario in India to that of
Bhutan as the conditions prevailing in these countries are different. Firstly, India is
currently experiencing a huge shortage in firm as well as peak power requirement
and it is imperative to attract players (both from the public and private sphere) in
this sector so as to overcome the shortage. The only way to do this would be by
allowing an attractive CoE such as the one being allowed currently by the CERC.
Secondly, a relatively high CoE would be admissible for private sector investments
as the risks associated with transmission and distribution (T&D) of power is
relatively high (at least in the Indian scenario wherein T&D companies have to buy
power from generators which are thermal based and predominately coal fired which
are imported and therefore are subject to global price fluctuations). However, in
Bhutans case, allowing a high CoE for a state run monopoly with no associated risks
(as the tariff determination model is based on a cost-plus model with electricity
purchase price from DGPC fixed) is not warranted.
Furthermore, based on the tariff revision order issued by BEA for the last tariff
period (August 2010 to June 2013) vide letter no BEA/ECO/TARIFF/2010-2011/100
dated 12 August 2010 (Annexure II, point 5 of this letter), a CoE of 10%was used
and approved.
Based on these justifications, for the purpose of reviewing the tariff revision proposal
submitted by BPC, a CoE of 10% is appropriate instead of the proposed 16%.
5.2.1.3
Cost of Debt (CoD)
The Cost of Debt (CoD) is the weighted average interest rate of BPCs loans including
any major loans that have been fully redeemed, with suitable allowance made for
currency risk of any loans not made in local currency.
The following table shows the status of debt of BPC as of 31 December 2012 (as per
the audited financial statements for 2012) as well as the schedule of loans for the
future.
Page 30 of 56
Table 29 : Loan outstanding and Cost of Debt calculations of BPC

All figures in Nu.
Particulars of
Loan
RE I
RE III
RE III
THP
RE JICA I
RE IV ADB
RE JICA II
RE V ADB
NPPF
ADA Loan
Future Loan
Total
CoD per year
Interest
Rate
6%
6%
6%
9%
0%
0%
0%
0%
9%
0%
13.32%
31.12.2012
31.12.2013
31.12.2014
31.12.2015
190,993,571
348,190,917
419,251,099
659,830,428
1,374,366,216
1,029,180,345
575,267,043
343,529,831
503,130,000
40,727,707
-
182,689,503
329,865,079
401,022,791
549,858,690
1,374,366,216
1,029,180,345
979,806,452
726,220,000
461,202,500
255,321,680
-
174,385,434
311,539,241
382,794,482
439,886,952
1,374,366,216
1,029,180,345
979,806,452
726,220,000
419,275,000
277,936,483
18,598,313
166,081,366
293,213,404
364,566,173
329,915,214
1,374,366,216
1,029,180,345
979,806,452
726,220,000
377,347,500
277,936,483
1,100,093,197
5,484,467,157
6,289,533,255
6,133,988,918
7,018,726,350
2.96%
2.32%
2.15%
3.70%
CoD (Tariff Period)

2.76%
As these figures have been audited as per the Royal Audit Authoritys norms, the
figures as presented by BPC are acceptable for the computation of CoD.
However, BPC has proposed an interest rate of 13.32% for loans to be taken in the
future (2014 and 2015) for funding some components of its transmission program.
This has been revised downwards to 12% given the fact that the cost of debt in India
(if borrowing will be made from India) as well as in Bhutan is in the order of 12%.
The following table shows the computation of CoD as proposed by BPC as well as
the revised figures for the various customer categories which has been apportioned
based on the asset allocation factor as approved for the last tariff period (August 2010
to June 2013) based on BEAs Tariff review report (September 2010, Table 54 on page
36).
Table 30 : Proposed and recommended Cost of Debt calculations for the various
customer categories
Consolidated Export
HV
MV
LV
Cost of debt (As proposed by
2.76%
9.43%
10.73% 1.38% 1.27%
BPC)
2.69%
9.30%
10.20% 1.34% 1.25%
Cost of debt (As reviewed)
5.2.1.4
Tax rate
The tax rate is the prevailing rate, which BPC has proposed as 30% in line with
Section 45, Chapter 49 of the Income Tax Act of the Kingdom of Bhutan 2001.
This tax rate of 30% as proposed by BPC has been reviewed and is acceptable.
5.2.1.5
Weighted Average Cost of Capital (WACC)
Based on the review of the various parameters required for the computation of
WACC as discussed in the preceding sections, the following table shows the
Page 31 of 56
accepted values of these parameters and the corresponding values of WACC for the
various customer categories.
Table 31 : Recommended WACC for the various customer categories
Consolidated Export
HV
MV
Gearing ratio
40%
40%
40%
40%
10%
10%
10%
10%
Cost of debt
2.69%
9.30% 10.20%
1.34%
Tax rate
30%
30%
30%
30%
WACC
9.65% 12.29% 12.65%
9.11%
LV
40%
10%
1.25%
30%
9.07%
It is recommended that these values of WACC be used for the purpose of

determining the tariff rate for each customer category.
5.2.2
OPERATION AND MAINTENANCE COST
The following table shows BPCs Operation and Maintenance expenses for the
previous three years broken up by functions as well as the allowed O&M expenses.
This breakup is in the ratio of 7%, 24%, 51% and 19% for Generation, Transmission,
Distribution and Other asset classes, respectively (which has been obtained if a
Current Replacement Cost model had been used).
Table 32 : Actual and approved O&M costs of BPC for the last tariff period
Historical O&M costs (million Nu.)
2010
2011
2012
Average
Generation
47.64
54
70
61
Transmission
159
180
233
202
Distribution
339
383
496
431
Other
124
141
182
158
Total actual O&M costs
669
758
981
852
BEA approved O&M costs
660
711
802
724
From the above table, it can be concluded that BPCs O&M costs have exceeded the
allowable O&M costs for each year of the previous tariff period. The following table
shows the breakup of the O&M costs by activity:
Table 33 : Break-up of actual O&M costs incurred by BPC
Actual O&M expenses (million Nu.)
2010
Employee cost
489.665
O&M cost
139.713
40.074
Total
669.452
2011
539.638
150.429
67.578
757.645
2012
708.177
185.787
86.584
980.548
The following table shows the growth rate for the various components of the O&M
costs.
Table 34 : Growth rate of O&M costs incurred by BPC
Actual O&M expenses
2010
Employee cost
12.66%
O&M cost
15.60%
2011
10.21%
7.67%
2012
31.23%
23.50%
Page 32 of 56

Total
-0.12%
12.39%
68.63%
13.17%
28.12%
29.42%
As can be seen from the above table, there has been a drastic increase in the
employee cost of BPC during the last three years of the tariff period.
As per the BEAs tariff review process for the last tariff period (August 2010 to June
2013) based on BEAs Tariff Review Report, the O&M cost for the tariff period is to
be determined by computing the Current Replacement Cost (CRC) and allowing for
an O&M benchmark percentage on this and also adjusting the value for expected
inflation in the tariff period.
The CRC for the existing assets of BPC as computed by BPC and as reviewed is
shown in the following table:
Table 35 : Current Replacement Cost calculations for BPC
Current replacement cost (million Nu.)
Activity
As proposed by BPC
As reviewed
Micro hydropower plants
1,437
1,387
Transmission
11,985
11,484
Distribution
8,509
8,083
Other
4,687
4,539
Total
26,617
25,493
The reviewed CRC has been computed by using the following inflation rates as
published by the National Statistics Bureau (NSB).
Table 36 : Historical inflation rates as published by NSB
Year
Inflation (%)
2002
1.60%
2003
3.91%
2004
4.93%
2005
5.30%
2006
4.78%
2007
9.04%
2008
4.05%
2009
9.10%
2010
8.45%
2011
9.54%
2012
4.78%
The following table shows the benchmark O&M allowances for the computation of
the absolute values of O&M costs for the current year by multiplying the CRC with
the benchmark O&M allowance. The values approved by BEA is as per the last tariff
period (August 2010 to June 2013) based on BEAs Tariff Review Report (September
2010, Table 45 on page 30).
Page 33 of 56
Table 37 : Benchmark O&M costs as a % of capital costs

Benchmark O&M
As proposed by BPC
Microhydel
Diesel generation
Transmission
Distribution
Other
% of capex
% of capex
% of capex
% of capex
% of capex
As approved by BEA
2.50%
10.00%
2.00%
3.00%
2.00%
2.50%
10.00%
1.00%
3.00%
2.00%
Based on these assumptions, the benchmark O&M costs for 2012 has been calculated
as shown below.
Table 38 : Calculated benchmark O&M costs using the CRC methodology
Current
Calculated O&M
O&M benchmark
replacement cost
costs for 2012
values
(million Nu.)
(million Nu.)
O&M costs
As
proposed
by BPC
As
approved
by BEA
As
proposed
by BPC
As
reviewed
As
proposed
by BPC
As
reviewed
2.50%
2.50%
1,437
1,387
35.923
34.672
10.00%
10.00%
Transmission
2.00%
1.00%
11,985
11,484
239.695
114.837
Distribution
3.00%
3.00%
8,509
8,083
255.261
242.501
Other
2.00%
2.00%
4,687
4,539
93.736
90.789
26,617
25,493
625.615
483.799
Micro hydro
Diesel generation
Total
As evident, if these O&M values are used as a benchmark for 2012, it will be
extremely low compared to the actual value of O&M costs incurred by BPC for 2012.
This is only 63.7% and 49.24% of the actual O&M costs of Nu. 980.548 million when
compared to the value proposed by BPC and as reviewed, respectively. Therefore, it
would not be prudent to use this methodology for estimating the O&M costs for the
tariff period as it does not reflect a realistic scenario.
This same problem was also encountered by BEA in 2010 when reviewing the tariff
proposal submitted by BPC for the last tariff period (August 2010 to June 2013) as
stated in the Tariff Review Report (September 2010, Section 3.2.2.3).
BPC has proposed an O&M cost for the tariff period based on the actual O&M cost
incurred for 2012 and adjusted this with an annual inflation of 8.9% annually for the
subsequent years in the tariff period. Accordingly, the following table shows the
proposed O& M costs for the tariff period made by BPC.
Table 39 : O&M costs proposed by BPC for the tariff period
Proposed O&M costs (million Nu.)
2012
2013
Generation
70
76
Transmission
233
261
Distribution
496
561
Other
182
206
License fees
20
Total actual O&M costs
981
1,124
2014
83
322
645
235
21
1,307
2015
90
389
725
271
21
1,496
Page 34 of 56
However, for the purpose of reviewing the tariff proposal as submitted by BPC, the
average O&M cost incurred by BPC during the last three years of the tariff period
(2010 to 2012) has been considered with an annual inflation rate of 6.9% so as to
determine the O&M costs for the tariff period 2013 to 2015.
Although BPC has used the actual O&M costs incurred for 2012 as a benchmark, only
the average O&M costs for the last tariff period (2010 to 2012) has been assumed.
This is also in line with BEAs review and approval for the last tariff period (August
2010 to June 2013) as outlined in BEAs Tariff Review Report (September 2010).
However, while reviewing the breakup of the O&M costs of BPC for the last tariff
period, it has been found that certain inadmissible costs have also been included
which are not permissible. These costs are license fee, donations and contributions,
write-offs, income from hiring and income from rental. In accordance with clause
3.2.2.3.1 of the BEAs Tariff Review Report (September 2010), these costs have been
deducted from the actual O&M costs incurred for 2010 to 2012 while computing the
average O&M costs to be used as a benchmark cost.
The following table details out the actual admissible O&M costs to be used as a
benchmark for 2012.
Table 40 : Benchmark average O&M costs recommended
Actual O&M expenses
Employee cost
O&M cost
Total
Average O&M costs
Deductions to be made
License fees
Donations and contributions
Write-offs
Income from hiring
Income from rental
Total
Final O&M expenses after adjustment
Average O&M costs after adjustment
2010
489.665
139.713
40.074
669.452
5.952
1.634
0.022
0.920
10.009
18.536
650.916

2011
2012
539.638
708.177
150.429
185.787
67.578
86.584
757.645
980.548
802.548
5.930
0.748
0.000
0.483
7.162
750.483
791.408
3.530
3.602
0.172
0.418
7.722
972.826
It must be noted here that for 2011 and 2012, BPC has not shown any figures for
rental income and this has not been reflected in the analysis. It is not possible for BPC
to lose this revenue stream suddenly given that it still owns staff quarters and other
assets that are provided on rent which bring in rental income. The income from this
source needs to be provided by BPC and reflected in a more transparent manner.
Based on this information being made available by BPC, the allowable O&M costs for
2011 and 2012 needs to be readjusted accordingly.
Also, as per schedule 14 of the annual report of BPC for 2011 and 2012, Nu. 25.081
million and Nu. 38.059 million is shown under other miscellaneous expenses for the
two years respectively while for 2010, only Nu. 11.807 million was booked under the
Page 35 of 56
same budget head. BPC needs to provide justifications for this drastic increase in
costs and be more transparent. Based on this information being made available by
BPC, the allowable O&M costs for 2011 and 2012 also needs to be readjusted
accordingly.
5.2.3
OPERATION AND MAINTENANCE EFFICIENCY GAINS
As per clause 6.3.2 of the TDR, an O&M efficiency gain is to the used for the purpose
of determining the tariff rates. As per the BEAs approval for the last tariff period
(August 2010 to June 2013) based on BEAs Tariff review report (September 2010,
clause 3.2.2.3.3 on page 30), an O&M efficiency gain of 2% was approved and used.
As per BPCs tariff revision proposal, an efficiency gain of 0% has been used for
determining the tariff rates.
However, for the purpose of reviewing the tariff revision proposal submitted by
BPC, an O&M efficiency gain of 2% is appropriate.
5.2.4
REGULATORY FEES
BPC has proposed regulatory fees for the tariff period as shown in the table below.
This includes a regulatory fee of Nu. 14 million annually for the National Load
Dispatch Centre (NLDC) also. The regulatory fee has been computed as 0.15% of the
overall revenue forecast of BPC for the tariff period.
Table 41 : Proposed regulatory fees for the tariff period
Proposed regulatory fee (million Nu.)
2013
21
2014
21
2015
21
It could not be verified if the inclusion of Nu. 14 million annually is justifiable and
allowable by BEA or not. This needs to be verified during the process of review by
BEA.
5.2.5
INFLATION
Inflation is used for the purpose of estimating the following three parameters in the
tariff determination model:
(i)
(ii)
(iii)
O&M expenses for the subsequent years of the tariff period based on a
Inventories for the subsequent years of the tariff period based on a
Cost escalation in the Capital expenditure
Accordingly, BPC has used the following inflation figures for the tariff period:
Table 42 : Inflation figures proposed by BPC for the tariff period
2013
2014
2015
7.00%
8.80%
10.90%
Inflation (%)
Average
8.9%
Page 36 of 56
However, it is felt that a more realistic figure be used based on the forecast made by
the International Monetary Fund (IMF). Accordingly, the following figures would be
appropriate for the purpose of reviewing the tariff proposal.
Table 43 : Recommended inflation figures as per IMF forecasts
2013
2014
7.81%
6.45%
Inflation (%)
5.2.6
2015
6.45%
Average
6.9%
DEPRECIATION
Depreciation is to be calculated based on the prescribed useful service life of the

various assets classes and gross asset values as per the investment schedule planned
during the tariff period (2013 to 2015).
However, the following table shows that the depreciation that was approved by BEA
for the last tariff period has far exceeded the actual deprecation costs incurred by
BPC. The deprecation approved for the last tariff period is as per BEAs tariff review
report (September 2010, clause 3.2.1.3.3, Table 37 on page 26).
Table 44 : Approved and actual depreciation for the last tariff period
2010
2011
Approved depreciation (million Nu.)
553.000
654.000
Actual depreciation (million Nu.)
443.956
537.551
Difference (million Nu.)
109.044
116.449
2012
773.000
638.523
134.477
Accordingly, it is recommended that this over-recovery made by BPC from

customers by means of a higher tariff paid than what should have actually been
charged, needs to be adjusted in the forthcoming tariff period.
By virtue of achieving an actual capitalization amount much lower than the
approved quantum, other parameters such as the WACC (as the Cost of Debt would
be much lower than initially envisaged due to loans not being taken), Return on
Assets and Return on Working Capital also needs to be adjusted in the proposed
tariff period, as BPC has made over-recoveries from its customers for the last tariff
period.
BPCs proposal also includes a return on assets for granted assets that were provided
by the Austrian Government for electrification of Phobjika valley. As per clause 6.6.2
of the TDR, a licensee is not allowed to earn a return on assets for asset classes that
have been funded through donor grants. As per BEAs Tariff review report
(September 2010, clause 3.2.1.3.3), BPC had done the same thing and BEA had made
adjustments accordingly in determining the tariff for the last tariff period. It is
accordingly recommended that the asset classes funded by the Austrian Government
for rural electrification works in Phobjika valley be adjusted in determining the tariff
for 2013 to 2015.
Furthermore, it is recommended that a system by instituted wherein adjustments for
depreciation, capital investments and other parameters which are very difficult to
forecast for the future, be made in the next tariff period.
Page 37 of 56
5.2.7
INVESTMENT PLAN
BPC has proposed to make investments over the next three years of the tariff period
which will result in the capitalization of assets in the order of about Nu. 8,439
million. The following table shows the asset additions proposed to be made to the
existing asset base over the next three years.
Table 45 : Asset capitalization proposed by BPC for the tariff period
All figures are in million Nu.
Gross Asset
Asset class
2013
2014
2015
Total
(2012)
Buildings & land
1,621
228
349
453
1,030
Generation
711
1
2
2
6
Transmission
7,462
359
1,901
1,852
4,112
Distribution
6,051
697
1,127
705
2,529
Vehicles
230
35
39
44
118
Office equipment
649
78
110
134
323
Tools
183
32
49
70
151
TOTAL
16,907
1,430
3,577
3,261
8,268
However, based on historical trends, BPC has not been able to achieve its plans as
envisaged. The following table shows the capitalization schedule proposed by BPC
during the last tariff period.
Table 46 : Asset capitalization proposed by BPC for the last tariff period
2010
2011
2012
Total
Buildings & land
256
290
266
812
Generation
54
31
7
92
Transmission
468
910
1,299
2,677
Distribution
2,655
626
2,033
5,314
Others
86
499
359
944
TOTAL
3,519
2,356
3,964
9,839
The following table shows the actual capitalization that was achieved during the
tariff period (2010-2012).
Table 47 : Actual asset capitalization achieved by BPC
2010
Buildings & land
Generation
Transmission
Distribution
Others
TOTAL
201
(0)
440
230
90
960
2011
215
(1)
(53)
1,560
270
1,990

2012
Total
143
559
0
(1)
760
1,147
1,018
2,808
275
635
2,196
5,147
Page 38 of 56
The following table shows the capitalization that was approved by the BEA for the
last tariff period based on BEAs Tariff Review Report (September 2010, Table 36 on
page 25).
Table 48 : Asset capitalization approved by BEA for the last tariff period
2010
2011
2012
Total
Buildings & land
178
200
181
559
Generation
48
27
6
81
Transmission
395
736
1,043
2,174
Distribution
2,406
395
1,678
4,479
Others
60
183
223
466
TOTAL
3,087
1,541
3,131
7,759
These estimates were arrived at by BEA by using the following asset performance
factors as outlined in BEAs approval for the last tariff period based on BEAs Tariff
Review Report (September 2010, table 35 on page 25).
Table 49 : Asset performance factor approved by BEA for the last tariff period
Asset class
Performance factor (%)
Buildings & land
70%
90%
Generation
90%
Transmission
100%
RE Distribution
System operation and ICT program
90%
70%
Others
Weighted average
90.2%
The review finds that BPC has not been able to capitalize assets as proposed. The
following table shows the actual achievement made by BPC in terms of capitalization
with respect to the proposed investment schedule for the last tariff period (2010 to
2012).
Table 50 : Actual achievement made by BPC for the last tariff period compared to
the proposed capitalization
2010
2011
2012
Total
Buildings & land
78%
74%
54%
69%
Generation
0%
-4%
0%
-2%
Transmission
94%
-6%
58%
43%
Distribution
9%
249%
50%
53%
Others
105%
54%
77%
67%
TOTAL
27%
84%
55%
52%
It is recommended that the performance factor for each asset class based on this
historical trend be used to estimate a more realistic figure for the actual addition of
assets for the tariff period 2013-2015.
Page 39 of 56
Based on the actual capitalization that will be achieved for the tariff period (20132015), the adjustments can be made accordingly in the next tariff period (2016-2018).
5.2.8
ALLOCATION FACTOR
Asset allocation factors are to be used for the purpose of apportioning the costs
related to O&M expenses, regulatory fees, inventory and other asset related costs.
BPC has used the following allocation factors for the purpose of determining the
costs for each customer category.
Table 51 : Recommended asset allocation factors for BPC
Asset allocation factors
Export
HV
MV
LV
Buildings & land
Land
20%
50%
15%
15%
Buildings
20%
50%
15%
15%
Civil structures
20%
50%
15%
15%
Generation
Civil structures
0%
0%
0%
100%
Electro-mechanical
0%
0%
0%
100%
Mini & micro hydel
0%
0%
0%
100%
Diesel generator sets
0%
0%
0%
100%
Transmission
Civil structures
20%
50%
15%
15%
400+ kV lines
100%
0%
0%
0%
220 kV lines
55%
45%
0%
0%
132 kV lines
50%
33%
7%
10%
66 kV lines
0%
65%
15%
20%
Substations
0%
74%
11%
15%
Meters
20%
50%
15%
15%
Distribution
Civil structures
20%
50%
15%
15%
33 kV lines
0%
0%
45%
55%
11 kV lines
0%
0%
45%
55%
6.6 kV lines
0%
0%
0%
100%
LV lines
0%
0%
0%
100%
Substations &
0%
0%
0%
100%
transformers
Meters
0%
0%
0%
100%
Vehicles
20%
50%
15%
15%
Office equipment
20%
50%
15%
15%
Tools
20%
50%
15%
15%
Total
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
These factors were reviewed and found to be acceptable as they are in line with the
asset allocation factors as approved for the last tariff period (August 2010 to June
2013) based on BEAs Tariff Review Report (September 2010, Table 54 on page 36).
Page 40 of 56
5.2.9
ARREARS
For the purpose of computing the return on working capital, the arrears in days for
each customer category is required. Accordingly, BPC has proposed an arrear of 45
days for HV, MV and LV customer categories and 50 days for wheeling (export)
which is in line with the arrears as approved for the last tariff period (August 2010 to
June 2013) based on BEAs Tariff review report (September 2010, Table 49 on page
33).
This parameter as proposed has been reviewed and is acceptable.
5.2.10
EMBEDDED GENERATION
The amount of energy generated by BPCs own generation plants (mini and micro
hydropower plant) has been proposed as 15 GWh annually.
However, based on the energy generated by these plants historically and the
generation forecast for the plants, about 25.4 GWh of energy has been projected as
shown in the following table.
Table 52 :
Historical and forecasted energy generation of BPCs embedded

generation plants
Embedded Generation
Historical
Forecast Generation
(GWh)
Generation
2010 2011 2012 2013 2014 2015 2016 2017
Chumey Mini Hydel
3.8
4.2
4.2
4.2
4.2
4.2
4.2
4.2
Ura Micro Hydel
0.2
0.2
0.2
0.2
0.2
0.2
0.2
0.2
Tamshing Micro Hydel
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
Darachu Micro Hydel
0.8
0.9
0.5
0.5
0.5
0.5
0.5
0.5
Surey Micro Hydel
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
Gangzur Mini Hydel
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
Rongchu Mini Hydel
1.3
0.7
0.8
0.8
0.8
0.8
0.8
0.8
Khalanzi Mini Hydel
0.4
0.4
0.5
0.5
0.5
0.5
0.5
0.5
Gidakom Mini Hydel
5.9
5.3
6.4
6.4
6.4
6.4
6.4
6.4
Thimphu Mini Hydel
1.2
1.4
1.3
1.3
1.3
1.3
1.3
1.3
Sherubling Micro Hydel
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
Kuengarabten Micro Hydel
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
Tansibji Micro Hydel
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
Rangjung Hydel
4.6
7.7
9.7
9.7
9.7
9.7
9.7
9.7
Chenary Mini Hydel
0.6
0.0
0.0
0.0
0.0
0.0
0.0
0.0
Changchey Micro Hydel
0.9
0.9
0.6
0.6
0.6
0.6
0.6
0.6
Hesothangkha Mini Hydel
0.5
0.5
0.4
0.4
0.4
0.4
0.4
0.4
Rukubji Micro Hydel
0.1
0.0
0.1
0.1
0.1
0.1
0.1
0.1
Tingtibi Micro Hydel
0.1
0.2
0.2
0.2
0.2
0.2
0.2
0.2
Kekhar Micro Hydel
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
Diesel generators
1.7
1.2
0.1
0.1
0.1
0.1
0.1
0.1
Total
22.9 24.1 25.4 25.4 25.4 25.4 25.4 25.4
Page 41 of 56
Given the forecast data, the amount of energy generated from BPC owned embedded
generating plants should be considered as 25.4 GWh annually instead of 15 GWh as
proposed by BPC.
5.2.11
COST OF SUPPLY
The cost of supply for each customer category is a function of the energy import
price, the amount of energy imported, the energy sales forecast for each customer
category and other related parameters such as O&M costs, depreciation rates, Return
of Assets and Return on working capital.
The energy import price, the amount of energy imported and the energy sales
forecast for each customer category are covered in the following section.
5.2.11.1 Energy import price and amount
BPC has proposed an energy import volume of 3 GWh for each year of the tariff
period from West Bengal State Electricity Board Limited (WBSEBL) and Assam State
Electricity Board Limited (ASEBL), India at the prevailing average import price of
Nu 2.46/kWh. These imports pertain to small pockets at the border areas.
The following table shows the historical import data from ASEBL and WBSEDL.
Table 53 : Energy imports from ASEBL and WBSEDL for 2010, 2011 and 2012
Tariff (Nu/kWh)
Particulars
Unit
2010
2011
2012
2.27
Import from ASEB
GWh
0.530
0.560
0.600
2.50
Import from WBSEB
GWh
2.720
2.850
3.062
2.46
TOTAL
3.250
3.410
3.662
The proposal by BPC does not include 1.703 GWh of free royalty energy supply from
Jaldaka hydropower plant in India in the volume of re-imported energy. The royalty
energy from Jaldaka hydropower plant has been accounted in the overall quantum of
royalty energy.
Furthermore, BPC proposes that in the event of import of power through
PTC/WBSEDCL during the lean winter months (four to five months) to cater to the
needs of HV customers and mega hydro power projects under construction, the cost
for such imports will be passed on to the customers as per the policy directives of the
RGoB. This energy banking modality is still under negotiation between the
Department of Hydropower Systems and the Indian counterparts (PTC/WBSEDCL).
The proposal made by BPC has been reviewed and found to be acceptable.
5.2.11.2 Energy sales forecast
The energy sales forecast proposed by BPC for the various customer categories for
the forthcoming tariff period is shown in the following table.
Table 54 : Energy sales forecast as proposed by BPC
Customer category
2013
LV (GWh)
392.157
MV (GWh)
155.041
2014
413.382
197.895
2015
434.526
246.958
Page 42 of 56
HV (GWh)
Total domestic sales (GWh)
Wheeling (GWh)
1,307.872
1,855.070
4,926.923
1,375.696
1,986.973
5,156.111
1,375.696
2,057.180
5,128.059
The following table shows the forecast for energy sales to the various customer
categories by BPC for the last tariff period.
Table 55 : Energy sales forecast as proposed by BPC for the last tariff period
Customer category
2010
2011
2012
LV (GWh)
332.000
357.000
384.000
MV (GWh)
193.000
219.000
228.000
HV (GWh)
1,379.000
1,600.000
1,619.000
1,904.000
2,176.000
2,231.000
Wheeling (GWh)
4,871.000
4,613.000
4,599.000
The following table shows the energy sales approved by BEA for the last tariff
period.
Table 56 : Energy sales forecast as approved by BEA for the last tariff period
Customer category
2010
2011
2012
LV (GWh)
332.000
357.000
384.000
MV (GWh)
190.462
249.592
335.002
HV (GWh)
1,379.000
1,600.000
1,619.000
1,901.462
2,206.592
2,338.002
Wheeling (GWh)
4,907.000
4,595.000
4,455.000
The following table shows the actual energy sales made by BPC to the various
customer categories for the last tariff period.
Table 57 : Actual energy sales achieved by BPC
Customer category
2010
LV (GWh)
303.300
MV (GWh)
108.270
HV (GWh)
1,159.200
1,570.770
Wheeling (GWh)
5,579.490
2011
339.770
109.540
1,170.640
1,619.950
5,273.100
2012
378.125
124.215
1,267.248
1,769.588
4,895.67
Consequently, the following table shows the deviation in actual energy sales realized
compared to the energy sales forecast made by BPC for the last tariff period. As
evident, BPC was not able to meet its sales forecasts in each year of the tariff period.
Table 58 : Actual energy sales achieved compared to the energy sales forecast
Customer category
2010
2011
2012
-9%
-5%
-2%
LV (GWh)
-44%
-50%
-46%
MV (GWh)
-16%
-27%
-22%
HV (GWh)
-18%
-26%
-21%
15%
14%
6%
Wheeling (GWh)
Page 43 of 56
However, as it is very difficult to verify the energy sales figures proposed by BPC for
the proposed tariff period, it is recommended that the energy sales figures, as
proposed by BPC, be used for the purpose of determining the tariff rates for the
various customer categories.
The following table shows the actual energy sales for the last tariff period and the
projected energy sales for 2013 to 2015.
Table 59 : Actual energy sales achieved and proposed energy sales forecast
Actual (GWh)
Proposed (GWh)
2010
2011
2012
2013
2014
2015
303.300
339.770
378.125
392.157
413.382
434.526
LV
108.270
109.540
124.215
155.041
197.895
246.958
MV
1,159.200
1,170.640
1,267.248
1,307.872
1,375.696
1,375.696
HV
Total domestic
1,570.770 1,619.950 1,769.588 1,855.070 1,986.973 2,057.180
sales
5,579.490 5,273.100
4,895.67 4,926.923 5,156.111 5,128.059
Wheeling
The following table shows the growth rates in the energy sales volume as compared
to the previous year.
Table 60 : Growth rates in the actual and proposed energy sales
Actual (GWh)
Proposed (GWh)
2010
2011
2012
2013
2014
2015
12%
11%
4%
5%
5%
LV
1%
13%
25%
28%
25%
MV
1%
8%
3%
5%
0%
HV
3%
9%
5%
7%
4%
Total domestic sales
-5%
-7%
1%
5%
-1%
Wheeling
The following graph represents the information highlighted in the above two tables.
Historical and proposed energy sales volume

1,600
1,400
1,200
1,000
800
600
400
200
0
2010
2011
LV energy sales
2012
2013
MV energy sales
2014
2015
HV energy sales
Page 44 of 56
As evident from the above tables and the graph, the proposed energy sales figures
that have been used for the purpose of determining the tariff rates for the various
customer categories by BPC is found to be reasonable and therefore the same figures
as proposed by BPC be accepted for the purpose of the analysis. However, it is
observed that the energy sales forecast for the MV category seems to be quite
significant with respect to the year-on-year growth rates and accordingly, the figures
as proposed by BPC for the MV category needs to be reviewed and justified by BPC.
5.2.12
COLLECTION RATE
BPC has proposed a collection rate of 98% based on actual figures for 2012. The
following table shows the proposed collection rates for each customer category. The
weighted average collection rate has been computed based on the billed data for 2012
as provided by BPC.
Table 61 : Proposed Collection rates for the various customer categories
Customer category
Proposed Collection rate
LV
91%
MV
98%
HV
100%
Weighted average
98%
However, it is recommended that a collection rate of 100% be used as approved for
the last tariff period (August 2010 to June 2013) based on BEAs Tariff Review Report
(September 2010, clause 2.4.3 on page 10).
5.2.13
NON-TARIFF REVENUE
BPC has proposed a non-tariff revenue of Nu. 78.837 million annually based on an
average value of 2010-2012. The apportioning of these revenues have also been made
based on the distribution of the customer base across the various customer
categories.
The historical trend of non-tariff revenue earned by BPC is shown in the following
table. The average of the last three years (2010-2012) has been proposed for the future
years of the tariff period (2013-2015).
Table 62 : Historical non-tariff revenue earned by BPC
2010
Net other Income (Other income minus
49.729
interest from fixed deposits) (million Nu)
Average (million Nu.)
2011
2012
75.872
110.911
78.837
The following table shows the ratio of break-up of the non-tariff revenue. This has
been done on the basis of the spread of customer base as projected in the future.
Page 45 of 56
Table 63 : Apportioning of non-tariff revenue to the various customer categories

Apportioning of non tariff revenue
2013
2014
2015
99.96%
99.95%
99.96%
LV
0.03%
0.04%
0.03%
MV
0.01%
0.01%
0.01%
HV
100%
100%
100%
Total
BPCs non-tariff revenue has been growing steadily by about 50% for the last two
years. Accordingly, it is proposed that the non-tariff revenue for the most recent year
(2012) be used along with an appropriate growth rate based on the historical growth
rate figures rather than the average of the last three years, as proposed by BPC.
It is also to be noted here that BEA had approved a non-tariff revenue of Nu. 127.3
million for 2010 and Nu. 171.2 million for 2012 (Clause 3.4 on page 33 of the BEAs
Tariff Review Report - September 2010) which are much higher than the amount
proposed by BPC for the forthcoming tariff period.
5.2.14
LOSSES
For the purpose of computation of the tariff, losses are to be allocated to each
customer category and consists of technical and commercial losses. The following
table shows the values for losses as proposed by BPC and as reviewed for the
purpose of computing the tariff rates.
Table 64 : Proposed and recommended values of technical and commercial losses
Losses
Proposed by BPC
Reviewed
Technical
Commercial
Technical Commercial
LV
12%
5%
12%
5%
MV
2.5%
1%
2.5%
0%
HV
2.0%
0.5%
2.0%
0%
The reviewed values are in line with the approval for the last tariff period (August
2010 to June 2013) based on BEAs Tariff review report (September 2010, Table 8 and
clause 2.4.2.1 on page 9).
Furthermore, if the billing for demand charge is moved to kVA from the current kW
based methodology as proposed, it will result in reduced system losses, which will
benefit not only the customer but also the BPC. Accordingly, the reduction in system
losses that will arise also needs to be factored in while determining the tariff if there
is a shift in the billing methodology for demand charges.
5.2.15
DEMAND CHARGES
The threshold value as a percentage of the contract demand for MV, HV and MV
(hydropower construction) which will attract a minimum demand charge has been
proposed as 100%. This has been done so keeping in view that a lot of power is being
hoarded by some industries resulting in it not being available for allocation to the
ones actually needing it. However, with the high demand charge that has been
proposed for both HV and MV customers, there will not be a situation where
hoarding of power will be done as it will have huge financial implications.
Page 46 of 56
Furthermore, with the drastic increase in the demand charge proposed, the financial
impact on HV and MV industries at the time of factory shutdown for maintenance or
during force majeure events will be detrimental with the electricity bill being about
4-5 times of the current amount even when no electricity is drawn from the grid.
It is therefore recommended that the current value which is 70%, 37% and 50% of the
contract demand for HV, MV and MV (hydropower construction) respectively, be
retained.
Furthermore, it is recommended that an exit option be provisioned wherein HV and
MV industries are exempt from paying a demand charge at the time of factory
shutdown for maintenance or during force majeure events provided an advance
notice is given to BPC. Such a mechanism will allow HV and MV customers to avoid
having to pay such a high demand charge during unforeseen events. It should be
noted that this mechanism will not result in a loss to BPC as the energy that is not
drawn by the HV or MV customers can always be exported to India resulting in an
earning of wheeling charges for BPC.
It may also be noted here that HV and MV customers have been penalized upto now
for non-drawl of power as envisaged by having to pay 70% or 37% of the contract
demand (depending upon the customer type) as demand charges. This system was
instituted so as to allow BPC to recover the costs invested in asset capacity addition
to make power available to the customer. However, as the energy that is not drawn
by the customer has a ready market in India and can be exported, the revenue stream
that accrues to BPC through wheeling charges should be allocated back to the
customer. However, this is not being done currently. It is recommended that this be
re-looked at in greater detail and addressed.
Furthermore, the Capacity Reserve Charge (CRC) currently being levied by BPC is
three times of the requested contract demand multiplied by the prevailing demand
charges as per clause 12 of BPCs Terms and Conditions of supply of electricity for MV
and HV customers. With the revision of the demand charge as proposed by BPC, it
will result in a very high CRC to be paid (an increase of about 4-5 times as compared
to the status quo). It is therefore recommended that the CRC be decoupled from the
demand charge so as to reduce the upfront financial burden for new MV and HV
customers. A CRC can be retained but it should be at a level that is affordable and
prudent. Furthermore, the legal basis for BPC to charge this also needs to be looked
into as BPCs Terms and Conditions of supply of electricity for MV and HV customers
has technically not been approved by BEA.
Page 47 of 56
5.3
FINAL TARIFF STRUCTURE
Based on the parameters that have been proposed by BPC for the purpose of
computing the tariff for the various customer categories, the following is the
subsidized tariff rates as proposed by BPC for the period July 2013 to June 2016.
Table 65 : Tariff rates as proposed by BPC for the various customer categories
Customer Category
Proposed subsidized tariff
Low Voltage
0-100 kWh (Nu./kWh)
1.00
101-300 kWh (Nu./kWh)
4.10
300+ kWh (Nu./kWh)
4.10
LV bulk (Nu./kWh)
4.10
3.29
Medium Voltage
1.20
856.00
4.30
High Voltage
1.20
441.00
2.40
0.160
The following table shows the rate of increase in the electricity tariff rates vis--vis
the current rates.
Table 66 : Impact of tariff rates as proposed by BPC on various customer categories
Proposed
Existing
%
Customer Category
subsidized tariff
tariff
increase
as made by BPC
Low Voltage
0-100 kWh (Nu./kWh)
0.85
1.00
17.65%
101-300 kWh (Nu./kWh)
1.62
4.10
153.09%
300+ kWh (Nu./kWh)
2.14
4.10
91.59%
LV bulk (Nu./kWh)
2.14
4.10
91.59%
1.62
3.29
103.00%
Medium Voltage
1.79
1.20
-32.96%
115.00
856.00
644.35%
2.16
4.30
99.00%
High Voltage
1.54
1.20
-22.08%
105.00
441.00
320.00%
2.40
1.74
38.00%
0.111
0.160
44%
As evident, the rate of increase in the tariff as proposed by both BPC and DGPC are
simply too much and if these proposed rates are approved, it will result in most of
the business establishments in Bhutan to close shop.
Page 48 of 56
However, based on the review of the proposal submitted by BPC in line with the
parameters that were approved by BEA for the last tariff period (August 2010 to June
2013) as per BEAs Tariff Review Report (September 2010), a lot of inadmissible
parameters that have been assumed need to be revised.
Based on the revisions to be made on the parameters that have been outlined in the
preceding sections, it is envisaged that the tariff rates will be much lower than the
one proposed by BPC.
5.4
TARIFF IMPACT
The following section covers the impact of the electricity tariff revision in terms of
the increase in the monthly electricity bill for the various customer categories based
on the proposal made by BPC.
The table below estimates the average monthly energy consumption of electricity by
a typical urban LV customer in the winter. Accordingly, it is estimated that an urban
LV customer uses about 1,023 kWh of energy per month in winter.
Table 67 : Estimated monthly energy consumption by an urban customer in winter
Total energy used
Quantity
Wattage
Hours
per day (kWh)
Light bulb
6
60
4
1.44
Heater
1
2000
6
12
Geyser
1
2000
2
4
TV
1
300
4
1.2
Boiler
1
650
3
1.95
Rice cooker
1
650
3
1.95
Curry cooker
1
650
3
1.95
Refrigerator
1
400
24
9.6
Daily energy usage
34.09
Monthly energy usage
1,022.70
The following table shows the impact of the electricity tariff revision on a typical
urban LV customer in winter.
Table 68 : Estimated increase in bill for a typical urban LV customer in winter
Tariff (Nu./kWh)
Monthly bill (Nu.)
Electricity used per
Proposed
Existing
Proposed Existing Tariff
month
Tariff
0-100 kWh
0.85
1.00
85.00
100.00
101-300 kWh
1.62
4.10
322.38
815.90
300+ kWh
2.14
4.10
1,548.72
2,967.17
Total
1,956.10
3,883.07
Increase (in Nu.)
1,926.97
Increase (in %)
99%
The following table shows the impact of the electricity tariff revision on a typical MV
customer.
Page 49 of 56
Table 69 : Estimated increase in bill for a typical MV customer

Tariff
Power requirement
Power factor
Load factor
Monthly energy consumption
Energy charge
Demand charge 1
Energy charge
Demand charge
Total bill
Average one part tariff
Increase in tariff rate
Increase in bill in Nu.
Increase in bill in %
Unit
MW
Existing
Proposed
1.0
0.89
0.43
kWh
310,811.52
1.19
Nu/kWh
1.79
856.00
Nu/kW/month
115.00
Nu.
556,352.62
369,865.71
Nu.
115,000.00
960,404.56
Nu.
671,352.62
1,330,270.26
Nu/kWh
2.16
4.28
98%
658,917.65
98%
1 : The demand charge for the proposed tariff is based on Nu/kVA/month
A power factor of 89% and a load factor of 43% has been assumed for this analysis
The following table shows the impact of the electricity tariff revision on a typical HV
customer.
Table 70 : Estimated increase in bill for a typical HV customer
Tariff
Power requirement
Power factor
Load factor
Monthly energy consumption
Energy charge
Demand charge 1
Energy charge
Demand charge
Total bill
Average one part tariff
Increase in tariff rate
Increase in bill in Nu.
Increase in bill in %
Unit
MW
Existing
Proposed
1
0.70
0.73
kWh
524,334.50
1.54
1.19
Nu/kWh
105.00
441.00
Nu/kW/month
Nu.
807,475.13
623,958.06
Nu.
105,000.00
629,066.53
Nu.
912,475.13
1,253,024.58
Nu/kWh
1.74
2.39
37%
340,549.45
37%
1 : The demand charge for the proposed tariff is based on Nu/kVA/month
A power factor of 70% and a load factor of 73% has been assumed for this analysis
As evident from the above tables which show the impact that the proposed tariff
rates will have on all the three customer categories, the detrimental financial effects
to the end users will be huge. If the proposal as made by both the licensees is
approved, electricity will be unaffordable and inaccessible to many existing
customers of BPC.
Page 50 of 56
5.5
RECOMMENDATIONS
While reviewing the tariff revision proposal made by BPC, the following issues were
encountered which would require to be looked at in greater detail and needs to be
addressed in a holistic manner
(i)
The tariff rates proposed by BPC for each year of the three-year tariff period
is the same. It is felt that such a structure will mean that customers across all
categories will encounter a very steep price increase or a rate shock when
the new tariff is adopted. Accordingly, it is felt that a gradual increase in the
tariff should be adopted wherein the tariff is increased each year of the tariff
period. This will ensure that customers across all categories will be able to
absorb the increase in the tariff and will not feel a sudden surge in their
electricity bills.
(ii)
While the proposal submitted by BPC to switch the mode of billing for
demand charge from kW based to kVA based will inherently increase
energy efficiency in the industrial sector, MV and HV customers should be
allowed a grace period for making changes in their equipment and
manufacturing processes. This can be achieved by either having a
moratorium period of one to two years during which time the current
demand charges will be applicable (without the new proposed demand
charges applicable) or by reducing the proposed demand charge by a certain
factor. Such a move will enable industries (MV and HV customers) to reevaluate their energy usage and make changes in their machine usage
pattern, reconfigure machines or make investments in energy efficient
devices (variable speed control devices, appropriate sized motors, more
energy efficient motors, capacitor banks, etc.). It is however to be seen how
HV and MV customers will actually benefit from moving into this
immediately. A very strong case needs to be made by BPC so as to convince
HV and MV customers of the positive impacts of such a new system. HV
and MV customers will have to make a lot of investments so as to actually
see benefits of the new system. It would also be desirable if BPC works very
closely with the industry fraternity in terms of hand-holding and knowledge
transfer to help improve efficiency. This could be done by conducting
training programs at the factory premises, carrying out advocacy and
awareness programs, conducting case studies on some industries, etc. After
the industries are convinced and ready to move to the new billing system
for demand charges, BPC can then enforce this proposed change.
Furthermore, if the billing for demand charge is moved to kVA from the
current kW based methodology, it will result in reduced system losses,
which will benefit BPC. Accordingly, the reduction in system losses also
needs to be factored in while determining the tariff if there is a shift in the
billing methodology for demand charges.
(iii)
BPC has proposed a minimum billing amount for LV customers using less
than 100 kWh of energy per month. It is recommended that this proposal
not be considered for reasons that have already been outlined in the
foregoing sections of this report. However, if this proposal is adopted, it will
result in additional non-tariff revenue for BPC. Accordingly, this has to be
factored as additional non-tariff revenue in the tariff model resulting in a
reduction in the LV tariff.
Page 51 of 56
(iv)
The proposed investment and capitalization schedule made by BPC needs to

be reviewed and scrutinized in greater detail especially as BPC has not been
able to meet its targets as proposed from a historical perspective.
Accordingly, the asset performance factors also need to be reviewed in
greater detail. Adjustment of depreciation, WACC, RoA and RoWC for
which over-recoveries were made for the last tariff period has to be made in
the forthcoming tariff period. These parameters have a high bearing on the
final tariff price. It is also proposed to institute a system wherein
adjustments for depreciation, capital investments and other parameters
which are very difficult to forecast for the future, be made in the next tariff
period.
(v)
The proposed amount of energy sales to be made to the various customer

categories especially for MV customers needs to be reviewed and
scrutinized in greater detail especially as BPC has not been able to meet its
targets as proposed from a historical perspective.
(vi)
The non-tariff revenue forecast made by BPC needs to be reviewed more

closely as this value has been growing significantly (by about 50%) in the
past. Accordingly, a more realistic value for the non-tariff revenue needs to
be incorporated in the tariff model for the purpose of determining the final
tariff rates.
(vii)
BPCs figures for the amount of energy generated from its self owned
embedded generating plants needs to be reviewed in greater detail. It has
been proposed by BPC that the energy generation will drop substantially to
15 GWh from the historical generation capacity of about 25.4 GWh. As most
of these plants have now been synchronized to the national electrical grid,
the generation should increase rather than decrease. The reason as to why
these plants have such a low plant load factor needs explanation by the BPC.
(viii)
For 2011 and 2012, BPC has not shown any figures for rental income. BPC
must justify why there has not been an income from rental activities for 2011
and 2012 or why it has not been presented in a clear manner. It is not
possible for BPC to lose this revenue stream suddenly given that it still owns
staff quarters and other assets that are provided on rent. This is important as
it has a significant bearing on the admissible O&M costs and therefore on
the final tariff rates. Furthermore, as per schedule 14 of the annual report of
BPC for 2011 and 2012, Nu. 25.081 million and Nu. 38.059 million is shown
under other miscellaneous expenses for the two years respectively while for
2010, only Nu. 11.807 million was booked under the same budget head. This
sudden surge in expenses under this budget head needs to be explained in
greater detail by BPC. It is also recommended that the costs incurred for
O&M be reviewed thoroughly as a lot of inadmissible costs have been
assumed by BPC for calculating the benchmark O&M costs.
(ix)
The benchmark O&M rates for the various activities (Generation,

Transmission, Distribution and others) needs to be reviewed by the BEA
and revised accordingly as application of these benchmark values to the
Current Replacement Cost (CRC) of BPCs assets does not yield or reflect the
actual or prudent O&M costs incurred by BPC.
Page 52 of 56
(x)
The proposal made by BPC to revise some components of the miscellaneous

charges (service re-connection charges, meter testing charges, meter shifting
charges and tariff for temporary connection) has to be reviewed and
justified by BPC with actual figures for the past two to three years if the
proposal is to be accepted. Furthermore, if this proposal is accepted, a
corresponding change also needs to be incorporated in the projected nontariff revenue for the proposed tariff period by means of an upward revision
of the non-tariff revenue. This should result in a decrease in the proposed
tariff rates as made by BPC.
(xi)
The threshold value as a percentage of the contract demand for MV, HV and
MV (hydropower construction) which will attract a minimum demand
charge has been proposed as 100%. This has been done so keeping in view
that a lot of power is being hoarded by some industries. However, with the
high demand charge that has been proposed for both HV and MV
customers, there will not be a situation where hoarding of power will be
done. It is therefore recommended that the current value which is 70%, 37%
and 50% of the contract demand for HV, MV and MV (hydropower
construction) respectively, be retained. It is also recommended that an exit
option be instituted wherein HV and MV customers be exempted from
paying demand charge for force majeure and shutdown conditions
provided an advance notice is given to BPC. The revenue accrued as a result
of wheeling charges earned during such instances also need to be provided
back to the customer. It is recommended that this issue be looked into in
greater detail.
(xii)
The allowable CoE of 10% for BPC as per Schedule C of the TDR seems to be
too high keeping in view the corresponding returns that most companies in
Bhutan are currently making. It also needs to be borne in mind that these
companies are operating in a risky environment as they are exposed to
market and business risks. They also operate in a competitive and free
market environment while BPC is a monopoly and is not subjected to any
risks as the tariff mechanism is a cost plus model allowing BPC to recover
all costs and make a profit margin also. Allowing such a high CoE to BPC
translates into a high tariff rate resulting in many industries being unviable.
Accordingly, making a lot of other companies unviable for the benefit of one
company does not seem to be a good option for the economy. It is
recommended that the allowable CoE for BPC be reviewed and lowered to a
more reasonable and acceptable figure.
(xiii)
It is also recommended that a minimum service standard for BPC be

instituted. This is to ensure that customers are provided a level of service
that is desirable with minimum outages, prompt responses to service calls,
etc. Currently, there is no penalty applicable to BPC in the event of not being
able to meet certain standards. Accordingly, there is no incentive for BPC to
be efficient by means of ensuring that electricity provision is reliable and
good. Although, BEA had formulated a draft version of a service standard a
few years ago, this was not finalized and enforced. It is not fair on the part
of BPC to ask for an increase in the tariff without being accountable for
failing to meet its customers expectations. Moreover, by virtue of being a
monopoly, it is even more imperative that such a system be instituted.
Currently, BPCs customers are left at the mercy of BPC in terms of BPC
deciding on scheduled maintenance resulting in long outages which
Page 53 of 56
sometimes last several days. Such instances not only lead to inconvenience
to customers but also revenue losses for industries.
(xiv)
BPC currently has a Terms and Conditions of supply of electricity for MV and
HV customers and a Terms and Conditions of supply of electricity for LV and
LV bulk customers for its customers. A lot of the provisions outlined in these
two documents are unfairly in favour of BPC without a level playing field
for both the customer as well as BPC. The legal basis of this document needs
to be looked into by BEA as it has not been formally approved by BEA. It is
recommended that this document be reviewed thoroughly by BEA and
formally approved (after making relevant revisions to it) so as to ensure a
level playing field both for the service provider as well as the customer.
(xv)
It is recommended that the Capacity Reserve Charge (CRC) currently being

levied by BPC be decoupled from the demand charge as it will result in a
very high CRC in the event the demand charge as proposed by BPC is
approved. Furthermore, the legal basis for BPC to charge this also needs to
be looked into as this is provisioned in BPCs Terms and Conditions of supply
of electricity for MV and HV customers which has not been approved by BEA.
(xvi)
It is recommended that the TDR be reviewed and revised so as to ensure

that a system is put in place to ensure that both BPC and DGPC are
incentivized to enhance their operational efficiency. Currently, the TDR
allows both BPC and DGPC to recover all their costs resulting in there being
no incentive to optimize their cost structure. The only mechanism in place
currently in the TDR on this front is through an O&M efficiency gain (which
is a measly 2% as approved for the last tariff period). As evident, this is not a
very strong incentive for both the licensees to enhance efficiency.
(xvii)
It is also proposed that implementation of an energy efficiency program be

mandated for both DGPC and BPC so as to ensure that operational
efficiency is achieved. A regulatory requirement that is enforced is a
standard practice that is done by most regulatory bodies around the world.
Currently, there is no incentive for both the licensees to implement such a
program as it will result in lower energy sales volume and accordingly
lower revenue streams.
(xviii)
It has been observed that there is excess liquidity as shown in the book of
accounts for both BPC and DGPC. It is felt that some of this excess liquidity
could be utilized to redeem some of the outstanding loans so as to reduce
the CoD resulting in a decrease in the WACC. This would help in reducing
the tariff for the end users. Furthermore, even with such a high level of
liquidity, BPC still plans to take on loans to fund some of the projects
planned in the future. Doing this will result in higher levels of tariff as it will
increase the CoD.
(xix)
As per BPCs books of accounts, it is seen that income from other

miscellaneous sources is very high. This, however has not been accounted
for in the non-tariff revenue. It is felt that income from this source needs to
be taken into account while determining the final tariff.
(xx)
As per the books of accounts of both BPC and DGPC for 2012, it has been
observed that an unsecured loan was given to DHI at an interest rate of 8%
Page 54 of 56
by both these companies. The fact that these two companies are taking on
loans at much higher interest rates to fund some of their investments but at
the same time giving out loans at much lower rates does not seem to be
financially prudent. It is felt that the CoD for loans envisaged to be taken by
BPC should also be considered at this rate (8%). Furthermore, the revenue
stream that will accrue (through interest earnings) by virtue of making loans
available to DHI should be accounted for as non-tariff revenue for the
forthcoming tariff period.
(xxi)
The load factor assumed by BPC for the purpose of calculating the peak
demand in MW based on the energy sales forecast (so as to estimate the
demand charge), seems to be quite low. It is recommended that the energy
sales forecast for HV and MV customers be made based on the historical
trend of energy sales and the projected drawl of power by new customers.
The demand in MW can then be estimated by assuming a load factor also
based on the historical trend. Estimating a more realistic MW for the HV
and MV customer category is important as it will have a major bearing on
the demand charge calculated for the two customer categories.
5.6
CONCLUSION
The review carried out and covered in this report on the proposal made by BPC has
been done so in line with the TDR and BEAs Tariff Review Report (September 2010).
As per the review of the proposal made by BPC to revise the tariff for the various
customer categories, it has been found that the values assumed for many of the
parameters used to determine the final tariff rates are not admissible as they are not
in line with generally accepted principles or the basis that was used and approved by
the BEA while reviewing the tariff proposal for the last tariff period (August 2010 to
June 2013).
The following table shows the various parameters used for determining the tariff
rates that were reviewed and revised.
Table 71 : Summary of parameters used in the determination of tariff
Parameter
Proposed by BPC
Recommended
Gearing ratio (%)
Cost of Debt (%)
Cost of Equity (%)
Benchmark O& M values (%)
Benchmark O&M values
(absolute amount in million Nu.)
O&M efficiency gain (%)
Collection rate (%)
Commercial losses (%)
44%
9.43% for export,
10.73% for HV, 1.38%
for MV and 1.27% for
LV
16%
2.5% for generation,
2% for transmission,
3% for distribution
and 2% for others
Nu. 980.548 million
0%
98%
0.5% for HV, 1% for
MV and 5% for LV
40%
9.30% for export,
10.20% for HV, 1.34%
for MV and 1.25% for
LV
10%
2.5% for generation,
1% for transmission,
3% for distribution
and 2% for others
Nu. 839.541 million
(maximum)
2%
100%
0% for HV, 0% for MV
and 5% for LV
Page 55 of 56
Inflation (%)
Asset performance factor
Additional energy rate (Nu/kWh)
Royalty energy rate (Nu/kWh)
Import energy price (Nu/kWh)
Non-tariff revenue (million Nu.)
Allocation of subsidy
8.9%
1.20
0.13
2.46
78.837
100% to LV
6.9%
Based on past trend
1.19
0.00
2.46
110.911 adjusted for
historical growth rate
88.5% to LV, 11.5% to
MV
Page 56 of 56

6 Review of BPC DGPC Electricity Tariff Proposals

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6 Review of BPC DGPC Electricity Tariff Proposals

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Bhutan Chamber of Commerce and Industry

REVIEW OF THE ELECTRICITY TARIFF

- Bhutan Electricity Authority

EXECUTIVE SUMMARY .................................................................................................................. 1

ESSENCE OF THE HYDROPOWER SECTOR IN BHUTAN ................................................ 3

ELECTRICITY USAGE IN BHUTAN ....................................................................................... 4

FINANCIAL PERFORMANCE OF DGPC AND BPC............................................................ 4

VALUE ADDITION OF THE INDUSTRIAL SECTOR TO THE ECONOMY .................... 6

HISTORICAL TARIFF RATES ................................................................................................... 9

DGPCs TARIFF REVISION PROPOSAL ..................................................................................... 11

PARAMETERS USED IN THE DETERMINATION OF TARIFF ....................................... 11

WEIGHTED AVERAGE COST OF CAPITAL (WACC) ................................................... 11

OPERATION AND MAINTENANCE COST ..................................................................... 14

OPERATION AND MAINTENANCE EFFICIENCY GAINS ........................................... 15

REGULATORY FEES ......................................................................................................... 16

INVESTMENT PLAN .......................................................................................................... 17

DESIGN ENERGY ............................................................................................................... 17

AUXILLARY CONSUMPTION AND PLANT AVAILIBILITY .................................... 18

ANNUAL ENERGY GENERATION ................................................................................ 18

ROYALTY ENERGY ........................................................................................................ 18

FINAL TARIFF STRUCTURE ................................................................................................. 19

BPCS TARIFF REVISION PROPOSAL ........................................................................................ 24

STRUCTURAL CHANGES IN THE TARIFF PROPOSAL ................................................. 24

DEMAND CHARGE BASED ON kVA RATHER THAN kW .......................................... 24

MINIMUM AMOUNT FOR LV CUSTOMERS ................................................................. 25

ELIMINATION OF CROSS SUBSIDY............................................................................... 26

UPWARD REVISION OF MISCELLANEOUS CHARGES .............................................. 27

PARAMETERS USED IN THE DETERMINATION OF TARIFF ....................................... 29

WEIGHTED AVERAGE COST OF CAPITAL (WACC) ................................................... 29

OPERATION AND MAINTENANCE COST ..................................................................... 32

OPERATION AND MAINTENANCE EFFICIENCY GAINS ........................................... 36

REGULATORY FEES ......................................................................................................... 36

INVESTMENT PLAN .......................................................................................................... 38

ALLOCATION FACTOR .................................................................................................... 40

EMBEDDED GENERATION ............................................................................................ 41

COST OF SUPPLY ............................................................................................................ 42

COLLECTION RATE ........................................................................................................ 45

NON-TARIFF REVENUE ................................................................................................. 45

DEMAND CHARGES ....................................................................................................... 46

FINAL TARIFF STRUCTURE .................................................................................................. 48

TARIFF IMPACT ....................................................................................................................... 49

The following table summarizes the tariff proposal submitted by BPC.

Bhutan Chamber of Commerce and Industry

ESSENCE OF THE HYDROPOWER SECTOR IN BHUTAN

ELECTRICITY USAGE IN BHUTAN

Furthermore, as per the Energy efficiency baseline study conducted by the

FINANCIAL PERFORMANCE OF DGPC AND BPC

Bhutan Chamber of Commerce and Industry

Bhutan Chamber of Commerce and Industry

VALUE ADDITION OF THE INDUSTRIAL SECTOR TO THE ECONOMY

Difference (revenue from HV sales and opportunity

Bhutan Chamber of Commerce and Industry

Bhutan Chamber of Commerce and Industry

HISTORICAL TARIFF RATES

Energy charge for MV customers

0.7 0.7 0.7 0.7 0.7

Bhutan Chamber of Commerce and Industry

Demand charge for MV customers

Energy charge for HV customers

0.7 0.7 0.7 0.7 0.7

0.5 0.5 0.5

Demand charge for HV customers

DGPCs TARIFF REVISION PROPOSAL

PARAMETERS USED IN THE DETERMINATION OF TARIFF