PERFORMANCE OF POWER SECTOR IN

PUNJAB
The Punjab State Electricity Board was constituted as an integrated
power utility under the Electricity (Supply) Act 1948. It continued
discharging the generation, transmission and distribution functions up to
April 2010. The government of Punjab was required to unbundle the Punjab
State Electricity Board (PSEB) under the provisions of the Electricity Act
2003.
Box 2: Milestone in Power Sector Reforms in Punjab State
Sr. No
1
2
3

4
5
6
7
8
9

Key Development
The Punjab State Electricity Board (PSEB) was a statutory body formed
Re-organization of the erstwhile State of Punjab under the Punjab Reorganization Act 1966
PSERC was constituted under the provisions of Electricity Regulatory
Commissions Act,1998
MoU on power sector reforms signed between Ministry of Power, Govt of
India and Govt of Punjab
The Commission passed its first (tetail) tariff order on the proposal of PSEB
Submission of the Report of the Expert Group on Power Sector Reforms in
Punjab (Gajendra Haldea Report)
These Regulations may be called the Punjab State Electricity Regulatory
Commission (Conduct of Business) Regulations, 2005
Punjab State Electricity Regulatory Commission (Forum and Ombudsman)
Regulations, 2005.
Unbundling of Punjab State Electricity Board (PSEB)
PSPCL has filed its first ARR Petition for FY 2011-12

Date
Feb 01, 1959
May 01, 1967
March 3, 1999
March 30, 2001
Sept 6, 2002
March 06, 2003
March 07, 2005
August 17, 2005
April 16, 2010
Nov 30, 2010

However, under the pressure from certain political interests and

employees unions, it deferred the restructuring process of PSEB for many
years. Ultimately, the state government had to unbundle the PSEB into
separate generation, transmission and distribution companies. The Govt. of
Punjab vide its notification dated 16.4.2010 issued the Punjab Power Sector

Reforms and Transfer Scheme, 2010 and has notified two successor entities
of the erstwhile PSEB. The Punjab State Power Corporation Limited
(PSPCL) is one of the successor entities and is entrusted with the functions
of generation, distribution, wheeling and retail supply of electricity in the
state. The other successor entity, the Punjab State Transmission Corporation
Limited (PSTCL) is assigned with the functions of transmission of
electricity in the State, including functions of State Load Dispatch Centre
(SLDC).
The Punjab State Electricity Regulatory Commission (PSERC) was
established on 31.3.1999 under the Electricity Regulatory Commissions Act,
1998, a Central Act which was superseded by the Electricity Act, 2003. The
Commission is assigned various functions, such as determination of tariff for
generation, transmission and wheeling of electricity, supply to wholesale,
bulk or retail consumers etc. under Section 86 of the Act. Other major
functions of the Commission include regulating electricity purchase and
procurement process of Distribution Licensees; issue Licenses for
Transmission, Distribution and Trading of electricity and promote
generation /co-generation of electricity from renewable sources of energy. It
has also advisory role to make suggestions to the State Government on key
issues such as promotion of competition, efficiency and economy in
activities of the electricity supply system; promotion of investment and restructuring of electricity supply industry in the state.
Therefore, one of the major functions of the PSERC is to make a
balance between the interests of consumers and utilities promoting economic
efficiency in the sector. Like other Electricity Regulatory Commissions of

the country, PSERC has adopted Rate of Return (RoR) approach for the
regulation of power sector business in the state.
Under the RoR approach, the regulated utility is required to make exante proposals of the revenue requirement and get it approved from the
regulator on periodical basis. Ideally, there should be no significant
difference between the targets approved by the Commission and actual
achievements by the utilities. However, this was not a reality in the case of
Punjab. Many times, there were significant differences observed between the
actual performance of PSEB and the targets fixed by the Commission. The
Commission had to initiate true-up exercises to make adjustments between
the approved amounts and actual performance for various expenses, at later
dates when more reliable data was available.
With this background, this chapter targets to analyse the physical and
financial performance in the light of regulatory observations made by
PSERC during the last ten years. It may be noted that reform process was
initiated with formation of the regulatory commission in 1999. However, the
generation, transmission and distribution functions continued to be vested in
the Punjab State Electricity Board, a single entity. The PSEB was
reorganized quite recently on 16.04.2010 in to two separate companies, one
for generation and distribution functions and the other for transmission and
load dispatch centre which was a statutory requirement. Therefore, Panjab
study is an exercise in examining the changes in performance of the PSEB,
if any under the direction of the regulatory commission (PSERC) during the
last 10 years i.e. from 2001-02 to 2009-10. In Section I, we examine the
physical and financial performance of the utility taking into consideration
some performance parameters such as plant load factor, energy losses,

commercial losses etc. In section II, financial performance has been

examined in relation to the pricing policy being adopted in the state. In
Section III, some salient features emerging from the tariff order passed by
the PSERC for the year 2011-12 has been highlighted. Section IV includes
some of the regulatory concerns which emerge from the regulatory
experience of the PSERC. Section V includes conclusions and policy
recommendations.

SECTION 3.I: TECHNICAL PERFORMANCE

3.I.1 Electricity Generation System:
Generally, the Commission does not undertake any demand/supply
forecasting exercise for making future energy projections in the state.
However, as there is a shortage of power in the state,

the demand

projections were made on the basis of availability of power supply. It was

assumed whatsoever power is available would be consumed by various
categories of consumers. The demand supply scenario in the state is given in
the Table 1 as projected by Central Electricity Authority (CEA).
Table 3.1: Electricity Demand and Supply Scenario in Punjab
Year

Energy
Peak Demand
Available
Demand
Deficit
Demand
Demand
Deficit (%)
(MU)
(MU)
(%)
Met (MW)
(MW)
27577
28780
4.2
4936
5420
8.9
2001-02
28313
30082
5.9
5455
5849
6.7
2002-03
30520
31420
2.9
5622
5922
5.1
2003-04
30383
33393
9.0
5559
7122
21.9
2004-05
32591
35682
8.7
6158
7731
20.3
2005-06
34839
38641
9.8
6558
8971
26.9
2006-07
38795
42372
8.4
7340
8672
15.4
2007-08
37238
41635
10.6
7309
8690
15.9
2008-09
39408
45731
13.8
7407
9786
24.3
2009-10
Source: Central Electricity Authority, Monthly Reports (various issues)

It is shown in the Table 3.1 that over time since 2001-02, the gap
between demand and supply has widened over time. In 2001-02, the energy
and peak demand deficits were reported as 4.2% and 8.9 % which increased
to 13.4% and 24.3% respectively in 2009-10. The widening of gap is due to
failure in adding the planned generation capacity at the state as well central
levels. Another important reason is the faster increasing demand for
electricity across various sectors. In the FY 2009-10, the reported energy as
well as peak shortages were the highest, i. e. 13.8% and 24.3% respectively.
Table 3.2: Thermal-Hydro Mix in Installed Capacity Owned by the
State
Source (Fuel Type)
1990-91
1998-99
Thermal
1280 (42)
2130 (54)
Hydro
1769 (58)
1799 (46)
Total State Capacity
3049 (100)
3929 (100)
Source: Central Electricity Authority, Monthly Reports (various issues)

(Capacity (MW)
2010-11
2620 (70)
1142 30)
3762 (100)

Another important point is hydro-thermal mix in the generation

capacity. Initially, the state had a reasonably high relative share of hydro
capacity.
Table 3.3: Generation Capacity as on 31.03.2010
S. No.
A

Total Installed Capacity Punjabs Share (MW)

(MW)
Hydro: i)Bhakra Nangal Complex
1493.15
760.00
ii) Dehar Power House
990.00
475.20
iii) Pong Power House
390.00
89.64
iv) Central Hydro Projects (NTPC)
2954.00
495.47
Total (A)
5827.15
1820.31
i)
Central Thermal Projects (NTPC)
8688.00
755.00
ii)
Others
6840.00
579.96
Total (B)
15528.00
1334.96
PSEB Own Projects
a) Hydro: i) RSDHEP 4x150MW
600.00
600.00
ii) Mukerian 6x15 + 6x19.5
207.00
207.00
iii) Anandpur Sahib 4x33.5
134.00
134.00
iv) Shanan PHs 4x15 + 1x50
110.00
110.00
v) UBDC
3x15 +3x15.45
91.35
91.35
Name of the Power Station

vi) Daudhar Micro 3x0.5

vii) Nadampur Micro 2x0.5
viii) Rohti Micro
2x0.4
ix) Thuhi Micro
2x0.4
Sub Total (a)
b) Thermal:
i) GGSSTP, Ropar 6x210
ii) GNDTP, Bhantinda 4x110
iii) GHTP, Lehra Mohabat 2x210
iv) RSTP, Jalkhari 1x10
Sub Total (b)
Total C: (a) +(b)
Grand total (A) +(B) +(C)
Source: (i) PSEB: Basic Statistics 2009-10, Patiala
(ii) PSERC- Tariff Orders for various years.

01.50
01.00
00.80
00.80
999.00

1.50
1.00
0.80
0.80
999.00

1260.00
440.00
420.00
10.00
2130.00
3129.00
24484.15

1260.00
440.00
420.00
10.00
2130.00
3129.00
6284.07

However, over time, the relative share of thermal power has increased
rapidly. The relative share of thermal power in the total owned capacity has
increased from 42% in 1990-91 to 70% in 2010-11 (Table 3.2). The detailed
break up of sources of power and the total installed capacity dedicated to the
state as on 31.03.2010 is presented in the Table 3.3.
The Commission has approved the estimates of available power in the
state taking into consideration various performance parameters such as Plant
Load Factor (PLF) and auxiliary consumption of thermal power stations etc.
Table 3.4: Power Generation from Hydro and Thermal Sources

(Million

Units)
Thermal
Year

Generation

Hydro

Moving* Average

Generation

Total

Moving
Average

Generation

Moving*
Average

1990-91

5939

8679

14618

1991-92

5934

8742

14677

1992-93

7105

8613

15718

1993-94

8854

7468

16322

1994-95

8439

7254

8736

8448

17175

15702

1995-96

8232

7713

8667

8445

16899

16158

1996-97

9778

8482

8677

8432

18455

16914

1997-98

10274

9115

7626

8235

17900

17350

1998-99

10914

9527

9966

8734

20880

18262

1999-00

13831

10606

8732

8734

22563

19339

2000-01

14457

11851

7977

8596

22434

20446

2001-02

14669

12829

8334

8527

23003

21356

2002-03

13650

13504

8691

8740

22341

22244

2003-04

14236

14169

9812

8709

24048

22878

2004-05

14384

14279

7293

8421

21678

22701

2005-06

14834

14355

10414

8909

25248

23264

2006-07

15435

14508

8673

8977

24107

23484

2007-08

16457

15069

9044

9047

25501

24116

2008-09

18066

15835

8785

8842

26851
* Moving 5 year average Source: Centre for Monitoring of India Economy (CMIE) and Power Finance
Corporation Report, 2010

24677

In case of hydro power stations, the Commission has approved the

availability projections on the basis of average energy generation in the last
three years. The total energy available from the thermal and hydro sources is
given in the Table 3.4
Thermal power generation has increased over time at a higher growth
rate than the hydro power. This is because of relatively more capacity
additions at the thermal power stations. It may be noted that hydro stations
include power generation from the plants operated by Bhakra Beas
Management Board (BBMB) also, which is utility shared by the states of
Punjab, Haryana, Himachal Pradesh and Rajasthan. The average power
purchase cost is determined by estimating the energy available and cost of
power purchased from various internal as well external sources. The overall
scenario of energy availability presenting the estimates of total power
generation from own sources as well as external sources in 2011-12 and
their relative shares as approved by the PSERC are presented in the Table 3.
4.
Table 3.5: Estimated Power Availability in the State during FY 2011-12
(MU, 2011-12)

Sr. No
Station
Energy Available
1.
Thermal Station
18128
2.
Hydel Stations
3902
3.
BBMB
4349
4. =2+3
Total Hydro
8251
5. =1+4
Total own Availability
26379
6.
Outside purchase
17595
7.
Total Available in the state
43974
Source: Tariff Order issued by PSERC for the FY 2010-11

Percentage Share of total

41%
9%
10%
19%
60%
40
100

The Table 3.5 brings out that thermal power plants are the major
source of electricity supply in the state. The share of hydropower including
the energy received from BBMB sources will be 19% of the total power
generated. The commission has also approved 17595 MU to be purchased
from Central Power Undertakings such as NTPC, NHPC etc. Therefore,
about 40% of the total power is outsourced from out of the state power
stations.
As per provisions of the Electricity Act 2003, the tariff rates of power
supply from CPUs and BBMB are to be approved by the CERC. As the
choice of source of supply is limited, the PSERC has effectively little control
over the cost of power purchase from the outside sources. However, through
efficient purchase and demand side management, the utility can reduce the
power purchase bill from outside sources. This important issue is yet to
receive due attention from the utility as well as the commission.
It has been noted that the rates of power purchased from Central as
well as shared utilities are determined by CERC while the state commission
has discretion to fix the rates for the stations owned by PSEB. Since, the
generation business in Punjab is still associated with distribution and retail
supply business; it may not be possible to compare the internal power
generation cost of PSEB with the other sources available to state. However,
taking some performance parameters into account, one can examine the

physical performance improvements, if any, in the system over time. Plant

Load Factor (PLF) and auxiliary consumption are two important parameters
which can be used to evaluate the improvement in the generation system of
PSEB. The PLF and auxiliary consumption of internal power stations is
given in the Table 3.6.
It may be noted that improvement in PLFs across various plants was
not the same. Some of the power plants showed remarkable improvements in
comparisons to rest of the plants in the state.

Table 3.6: Plan Load Factor and Auxiliary Consumption in Punjab

Year
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08

Plan Load Factor (%age)

53
53
58
64
57
55
66
69
69
75
78
79
74
77
78
80
83
88

Aux. Consumption (%)

NA
NA
NA
NA
4
4
4
5
5
6
5
5
NA
NA
7
6
6
6

2008-09

85

2009-10
88
Source: Central Electricity Authority, and the Planning Commission Reports

NA

The plant wise PLF is given in the Table 3.7. It may be noted over
time, except for GNDTP, Bhatinda, other thermal power stations have
shown significant improvement in their performance.
Table 3.7: Plan Load Factor Across Various Power Plants in the State
(in %age)
Years
GNDTP, Bhatinda
GGSSTP, Ropar
1997-98
65.11
70.34
1998-99
66.70
70.01
1999-00
68.79
74.11
2000-01
72.49
76.44
2001-02
71.70
80.20
2004-05
51.69
82.28
2005-06
57.84
84.52
2006-07
56.8
88.52
2007-08
77.83
88.54
2008-09
73.83
87.07
2009-10
70.66
91.11
Source: Basic Statistics issued by PSERC

3.I.2:

GHTP, Lehra Mohabat

-59.20
81.35
87.71
83.55
89.94
85.51
93.58
95.1
94.89
96.44

Overall
69.10
69.40
74.70
77.90
79.20
77.5
79.9
83.1
87.65
85.48
88.43

Transmission and Distribution System

3.I2.A: Transmission and Distribution Losses

The high transmission and distribution losses was one of the main
reasons responsible for poor performance of the SEBs in India. Transmission
and distribution losses recorded in the Punjab power system are presented in
Table 8. In 2001-02, the T&D losses were estimated to be about 27% in
Punjab. Then, under the pressure of PSERC and other stakeholders, PSEB
showed some improved performance in the distribution sector. The T&D
loss level as reported by PSPCL was 19% in 2009-10. Most important
question is the reliability of the projected data. Since one-third of the power
supply to agriculture sector is un-metered, there is no way to assess the
actual technical and commercial losses in the system. The focus should be

on cent-percent metering of consumers so that the energy consumption and

losses are estimated accurately.
Table 3.8: Transmission and Distribution losses in the state
Years
T&D Losses in %age
19.26
1990-91
21.75
1991-92
19.61
1992-93
19.70
1993-94
17.19
1994-95
18.32
1995-96
18.95
1996-97
18.79
1997-98
17.98
1998-99
18.32
1999-00
26.58
2000-01
27.70
2001-02
24.42
2002-03
25.96
2003-04
25.42
2004-05
25.00
2005-06
26.00
2006-07
22.00
2007-08
20.00
2008-09
19.00
2009-10
Source: Planning Commission Annual Report on Working of SEBs and EDs
Power Finance Corporation Report 2004-05 to 2008-09. ARR of PSEB, 2011-12

SECTION 3.II: FINANCIAL PERFORMANCE

National Electricity Policy 2005 as well as Electricity Tariff Policy
2006 focus on rationalization of tariff structure and elimination the crosssubsidisation in the sector. It requires the respective state government to pay
the subsidy in advance on account of subsidized power supply to any class
of consumers. It further provides that the tariff should reflect the cost of
supply to ensure efficient use of power. However, in Punjab there is no
progress towards tariff rationalization. Moreover, the state government has
been providing free power to farm sector.

To examine the pricing policy of PSEB in relation to the cost of

supplying power, separate analysis has been carried out for each consumer
category with a view for determining the nature of relationship between the
average revenue realised from various consumer categories within the state and
the average cost of supplying power. It would help us to bring out the extent to
which energy sale to each consumer class involves profit earning or
subsidisation. It may be highlighted that existing tariff structure was not similar
for all the categories of consumers. There was slab system for the domestic
consumers, which consisted of three slabs on the basis of electricity
consumption. The first slab consisted of the electricity consumption upto 100
units/ month; second slab covered the consumption from 101 to 300 units/
month, and the third slab was for the consumption above 300 units/ month. The
industrial supply has been divided into three sub groups on the basis of
connected load, i.e., Small Power supply (up to 20 KW), Medium Power supply
(above 20 KW to 100 KW) and Large Power supply (above 100 KW). The
agricultural supply has two options for tariff. Metered supply was charged
according per unit tariff and unmetered supply according to per BHP/month
(Tariff Order for FY 2006-07, p.186). From analysis point of view we have
clubbed subgroups into main category as the separate data was not available.
The comparison between the average cost of supply and average revenue
realised from various categories of consumers has been presented in Table 9. In
this Table the figures in brackets are the average revenue as a proportion of the
average cost of supply (AR/AC) in percentage terms. In the analysis average
cost of supply was assumed to be same for all the consumer categories mainly
due to non-availability of data regarding consumer category-wise (or voltage
wise) cost of supply of electricity.

Table 3.9: Consumer Class-wise Average Revenue and Average Cost of

Supply
(Paise
Per Unit)
S.
No.

Description

1980-81

1997-98

2008-09

Domestic

Commercial

Industrial

Agricultural

148.50
(68.37)
276.33
(127.22)
241.75
(111.30)
FS

380.78
(91.88)
491.00
(118.48)
430.19
(103.80)
FS

Others

32.70
(89.69)
51.8
(142.07)
25.44
(69.78)
20.40
(55.95)
15.50
(42.51)
23.29
(63.87)
36.46

236.60
(108.93)
147.79
(68.04)
217.20

453.34
(109.48)
405.28
(97.79)
414.43

Annual Compound Growth Rates

1980-81
1997-98
1980-81
to
to
to
1997-98
2008-09
2008-09
9.31

8.94

9.16

10.35

5.36

8.36

14.16

5.38

10.63

17.39

4.77

12.26

11.48
9.60
10.74
Average Revenue
from sale with state
7
11.07
6.05
9.07
Average cost of
supply
Note: (i) FS- Free Supply (ii) Figures in brackets are the average revenue as a percentage of average cost of
electricity supply in a particular year. Sources: (i) Planning Commission, Annual Report on the working
of State Electricity Boards and ED, 1994,1997, and 2002 (ii) Statistical Abstract of Punjab, 2001-02.
(iii) PSERC: Tariff Orders for various financial years.

In fact, PSEB as well as Punjab State Electricity Regulatory Commision

(PSERC) have not estimated consumers category-wise cost of supply. The
Table 3.9 clearly depicts that average revenue realised from the commercial
consumers was higher than the cost of supply during the whole time period
under consideration. Since 1991 the industrial consumers were also paying
more than average cost of supply. The average revenue realised from domestic
and agriculture consumers was consistently lower than the cost of supply,
implying the subsidisation of domestic and agriculture supply.
According to the tariff policy adopted by the PSEB various categories of
the consumers were charged different rates even when electricity was supplied
at the same voltage (Tariff Orders issued by PSERC). Such practice of the

PSEB shows that there was discrimination in price being charged from various
categories of consumers regardless of cost of supply. The rationale provided for
subsidised supply to agriculture as well as domestic sectors has been to
promote social welfare of the peoples. But in actual practice, there has been
significant intra- category variations regarding their capacity to bear the cost.
In this regard, some independent studies (Ghose, 1998; Garg & Jain, 1998;
GOI, 2000 and World Bank 2001) depicted that most of the benefits of the
subsidies were being cornered by the big farmers, particularly in agricultural
sector. This implies that tariff rates do not have any systematic relationship
with the cost of supply. Mainly political considerations appear to have played a
dominant role in tariff setting. Obviously, State Governments compelled the
SEBs to follow certain pricing policy but abdicated from their responsibility to
compensate the SEBs keeping them in a perpetual financial crisis (Surinder
Kumar, 1999). This requires a reconsideration of the relationship between
electricity undertakings and the state governments on the one side and the
rationale for a pricing policy and subsidisation of certain consumers on the
other.
The analysis of financial loss or surplus from the sale of electricity to
various categories has been presented in Table 3.10.

Table 3.10: Consumer Category wise Surplus /Subsidy

(Rs. in Crore)

S. No.

Description

1980-81

1997-98

2008-09
ACGR
1980-81
To
1997-98

ACGR
1997-98
to
2008-09

ACGR
1980-81
to
2008-09

Domestic

-1.87

-231.38

-314.19

32.77

2.82

18.66

Commercial

+2.14

+42.46

+150.61

19.22

12.20

16.41

Industrial

-17.78

+176.98

+174.08

-0.15

Agricultural

-29.71

-1314.06

-2014.50

24.97

3.96

16.25

Others

-2.86

+9.87

+29.59

10.50

Total

-55.80

-1239.25

-264.03

20.01

-13.11

5.71

Source (i) Computed from the data collected from Annual Report on the Working of State Electricity
Boards and EDs, 1994, 2002. (ii) Statistical Abstract of Punjab, 2001-02. (iii) PSERC: Tariff
Orders for various financial years

The Table 3.10 reveals that revenue loss due to subsidised power supply
in 1980-81 was Rs. 55.80 crores and it increased to Rs. 1239.25 crores in 199798. During the year 2008-09 it was reduced to Rs. 264.03 crores. The reduction
in revenue loss is due to subvention paid by the state government on account of
free power to agriculture sector. It needs to be noted that subsidy per unit of
supply for domestic consumers increased from 3.76 paise per unit in 1980-81 to
68.70 paise in 1997-98. It reduced to 54.87 paise per unit in the year 2008-09.
Hence, total quantum of subsidy to domestic consumers has increased from Rs.
1.87 crores in 1980-81 to Rs. 231.38 crores in 1997-98 and further to Rs.
314.19 crores in 2008-09 mainly due to significant increment in electricity
consumption by the concerned category of consumers. Average revenue
realised from commercial consumers was higher than the average cost of
supply, so there was surplus. Per unit surplus increased from 15.34 paise to
59.13 paise during the period 1980-81 to 1997-98. It was recorded as 86.34
paise per unit in 2008-09. Therefore, the total quantum of the surplus has
increased from Rs. 2.14 crores to Rs. 42.46 crores and to Rs 150.61 crores
during the same period. It is pertinent to note that commercial consumers were

never subsidised and this category always contributed to the surplus to PSEB.
As far as industrial consumers were concerned, the comparison between
average revenue realised and average cost of supply shows that since after
1990-91, this category was also being overcharged and consequently
contributed surplus to the Boards revenue. Per unit revenue gap between cost
of supply and revenue realised has been recorded as -11.02 paise in 1980-81
and 24.55 paise in 1997-98. During the year 2008-09 it turned out to be 33.17
paise per unit. Subsequently, the total quantum of surplus has increased from
Rs.-17.78 crores to Rs.176.98 crores during the period 1980-81 to 1997-98. It
was calculated to be Rs. 174.08 crores in 2008-09. The analysis of the financial
performance of agricultural consumers presented a very interesting picture.
The pricing policy for the agricultural sector in Punjab consists of two types of
tariff and consumers could opt for any one of these. One system was a flat rate
system, which was levied according to the horsepower rating of the sanctioned
load of the motor used by the tube wells per month. The other was metered
supply where tariff was charged per unit of electricity consumed. The average
revenue did not keep pace with the increase in the cost of supply over the
period under consideration. Thus, total quantum of subsidy to this category
increased from Rs.29.71 crores in 1980-81 to Rs.1314 crores in 1997-98 and
further to Rs. 2014 crores in 2008-09. Being very low recovery rate of the cost
of supply through the revenue realised and significant amount of electricity sale
to this category, the quantum of subsidy kept on increasing consistently during
the period under consideration. Further, the Table 3.10 depicts that in case of
the category of other consumers (bulk supply & public lighting etc.) it was
noted that since after 1990-91 this category was also contributing to the surplus
of the Board. The total quantum of surplus from this category has been

recorded as Rs. 29.71 crores in 2008-09 as against to Rs. 2.86 crores in 198081 and Rs.9.87 crores in 1997-98.
It is clear from the above analysis that there were elements of
subsidisation and cross subsidisation in the tariff structure without any rational
justification. This implies that tariff rates do not have any systematic
relationship with the cost of supply and mainly political considerations appear
to have played a dominant role in tariff setting.
On basis of the analysis of technical as well as financial performance of
the Board it may be highlighted that the PSEB has played an important role in
creating an extensive network of electricity supply in the state. However, lower
level of operational efficiencies coupled with an irrational tariff structure has
led to increasing losses taking it to the verge of bankruptcy. It is in this
background that reform measures were initiated. Thus it may be concluded that
the reforms in Power Sector of Punjab did not lead to any significant
improvement in technical as well as financial performance of PSEB.
3. II. 1: Collection Efficiency
The collection efficiency in Punjab has increased in the recent year
(Table 3.11). It may be noted that 100% collection efficiency does not mean
that no dues is pending towards consumers. It simply represents the
collection in the relevant year. The collection may be the deferred amounts
pending towards consumers in past.
Table 3.11: Collection Efficiency in Punjab
Year
2004-05
2005-06
2006-07
2007-08

Collection efficiency
99.61
98.01
97.66
100.44

93.63

2008-09
Source: PFC Report for the respective years

As a result of increased collection efficiency, the reported AT& C losses

have decreased in the State. It is also shown that in comparison to All India
Average, the AT&C losses level was significantly lower in Punjab. However,
the reported data should be used with cautions because most of the power
supply to agriculture sector in still un-metered (Table 3.12).
Table 3.12: Comparison of AT& C Losses in Punjab with All India
Average
(%age)
Year
2004-05
2005-06
2006-07
2007-08
2008-09
Source: PFC Report for the respective years

Punjab
24
26
25
19
19

All India Average

34
35
32
29
30

SECTION 3.III: SOME SALIENT FEATURES EMERGING FROM

TARIFF ORDER OF PSERC FOR FY 2011-12
It may be interesting to undertake a comparative analysis of the
average cost of supply from various sources outside the state. It is shown in
the Table 13 that Overall cost of power purchase was approved as Rs. 3.11
per unit. At the same time the cost of power to be purchased from traders
(short term purchase) was the highest. The average cost from NPHC plants
is the lowest except BBMB which is the shared utility. The average cost
from NHPC is even lower than the per unit fuel cost of the Punjab power
utility. The Commission has estimated that per unit average fuel cost of
generation from internal/own thermal plants is Rs. 1.80 for the financial
year.2011-12.
Table 3.13: The cost of power purchase from outside sources

(FY 2011-12)

Source
Total Cost (Rs. Million)
21677.1
NTPC
4548
NHPC
2127
NPC
10073
Short-term Purchase
57512
Overall
Source: Tariff order issued by PSERC for FY 2011-12

Power Purchased (MUs)

7888
2580
800
2077
18488

Cost (Rs./Unit)
2.75
1.76
2.66
4.85
3.11

Since the cost of power purchase accounts for approximately 70-80%

of the total cost of power supply, therefore, it would be useful to compare
the cost of power generation from internal sources with external sources
available to Punjab. It will ensure more accountability in the system.
However, since the utility is still an integrated unit for the generation as well
as the distribution businesses, it is not possible to calculate the actual
generation cost as separate data on employee cost, R&M cost etc. for the
generation system & distribution system were not provided by the PSEB.
So, the commission should make some reliable estimates of cost of power
generation from internal sources by segregating the various cost items such
as employee cost, capital cost, R&M expenses etc between the generation
and distribution businesses.
3.III.1 Employee Cost
Employee cost is the second major component of the total expenses.
From time to time, the Commission has directed the utility to control the
employee cost by taking various initiatives such as training and skill
development programmes to enhance the productivity of the employees. The
licensee has submitted that it has taken various measures to control this cost.
Table 3.14: Employee Cost as approved by the Commission

(Rs.

Million)
Sr. No

Particular

1.

Salary

Projections
and

other

2231

Approval
1504

Percentage
approval

of
52%

total

expenses
1139
Terminal and Pension
Benefits
3.
-Arrears
4.
3370
Total Expenses
Source: Tariff order issued by PSERC for FY 2011-12
2.

1169

40%

245
2917

8%
100%

However, the directions given by the Commission have not been

implemented in order to enhance the productivity of the manpower.
Consequently, the employee cost burden is increasing year after year.
Moreover, the share of expenses on account of pension and terminal benefit
is unacceptably very high. The employee expenses projected and approved
are given in the Table 3.14.
It shows that the share of terminal benefits is very high. This is
because of the deferred liability passed over by the erstwhile PSEB. As per
standard practice, the terminal benefits should be paid out of the financial
contribution made towards provident fund & pension fund etc. during inservice period of the employees. However, it seems that the Board has
utilized the money in the fund for meeting other current expenses apparently
on the direction of the government. The commission should propose to the
state government that since these liabilities have been shifted from the
PSEB, therefore, the government should make payment on this account so
that the honest present consumers are not asked to bear this burden as it is
not justified. The employee cost per unit of sale of energy is given in the
Figure-3.1 (source: PFC reports).

The Graph 3.1 highlights that employee cost per unit of sale of energy
was almost stable for the period from 2004-055 to 2008-09. The Employee
cost was reported to be Rs. 0.5 per unit of sale in 2004-05. Afterwards, there
was little decrease in the cost for the next two years and it was reported as
0.55 in the FY 2008-09. It implies that there was no significant change in the
per unit employee cost. One important reason for little increase in the
employee cost was the ban on new recruitments. PSERC had pointed out
that the PSEB has enough manpower and it should improve the labor
productivity before making any fresh appointment in the Board.
3. III.2: Repair and Maintenance cost
The PSERC has been following its Tariff Regulations while
approving the Repair and Maintenance Cost (R&M). The commission links
the current year cost with the base year value though Wholesale Price Index
(WPI). Then, if required, certain directions are issued to the utility so that
the funds are utilized properly. For the FY 2011-12, the licensee had
proposed Rs. 414.74 crore for R&M. This amount also included Rs. 38.52
crore as expenses on the assets to be added during 2011-12. The commission
observed that this claim as a part of R&M expenses was not justified.

Therefore, the Commission disallowed this item while approving the R&M
expenses. Finally, it allowed Rs. 376 crore as R&M expenses. The
commission followed the same approach for the approval of administration
and general expenses. The actual expenditures on R&M are given in the
Table 3.15.
Table 3.15: Repair and Maintenance Cost
Year
R&M Cost (Rs. Crore)
2004-05
207
2005-06
223
2006-07
268
2007-08
274
2008-09
295
Source: PFC Report for the respective years

Annual Growth Rate

-8%
20%
2%
8%

It is indicated in the Table 3.15 that the growth rate for FY 2006-07
was reported highest. The main reason for this hike was approval of the
deferred amount during this year. However, during the FY 2007-08 it grew
at 2%. So, taking the average inflation rate into account, the increase in
R&M expenses is reasonably acceptable except for the FY 2006-07.
3. III. 3: Depreciation
The depreciation amount is approved to compensate the utility for the
wear and tear of capital employed in the business. According to the standard
practices, a company should recover the capital cost of the assets during the
useful life of the assets. The commission has approved the depreciation
amount for the year 2011-12 on the basis of audited accounts for the FY
2009-10. As required by standard accounting practices, the Commission has
applied different rates for the different type of assets. The rates and amounts
of depreciation approved by the commission are given in the Table 3.16.
Table 3.16: Depreciation Charges for the FY 2011-12
Crore)

(Rs.

Sr.
Item
Assets (Approved as on
Depreciation rate
Depreciation Amount
No
April 1, 2011)
1.
5689
5.17%
294
Thermal
2.
5985
2.28%
136
Hydro
3.
66
4.81%
3.19
Transmission assets
4.
7168
5.65%
405
Distribution assets
5.
19106
4.40
841
Total
So, applying the differential rates of depreciations, the total depreciation amount comes out to be Rs. 841
crore. The overall weighted average depreciation is 4.40% for the FY 2011-12.

3. III.4: The Interest and Finance Charges

The PSPCL had projected the interest and financial charges liability to
be Rs. 2203 crores for FY 2011-12. These projections are based on the
approval made by the commission during the past years (for FY 2010-11).
However, there are still some pending claims on which the commission is
not in agreement with the licensee. Therefore, the Commission did not
approve the entire loan amount taken by erstwhile PSEB from various
sources. Further, the interest on the working capital seems to be
unacceptably high. For example, the share of interest liability on working
capital is about 43 percent of the total interest charges proposed by the
licensee. The details of the interest charges proposed and approved are given
in the Table 3.17.
Table 3.17: Details on Loan Interest Payments in FY 2011-12

(Rs.

Crore)
Sr. No Particular
1.
Loan Amount (on April 1, 2011)
2.
Borrowing for FY 2011-12
3.
Repayment of loan during FY 2011-12
4.
Loan on the closing of FY 2011-12
5.
Interest payment
Source: Tariff order FY 2011-12 for PSPCL

Proposal
8013
2990
676
10328
985

Approval
6003
885
676
6213
656

The Commission has reduced the interest expenses by Rs. 329 crore
from the amount proposed by licensee. Though the commission has not
questioned the rate of interest applicable to the approved loans, however, the
commission has reduced the loan amount proposed by licensee. It was

reduced because the commission observed that the loans were being utilized
to meet out the current expenses. It may be noted from the Table 11, there
are wide differences in the loan amounts proposed by licensee and approval
given by the commission. Now, the question arises that what would happen
to the loan amount over and above the commissions approval. Since, it
stands on the balance sheet of the PSPCL and being a public sector unit, the
public has to bear this burden in future unless the same is not paid by the
state government. Therefore, under-approval of the interest expenses is not a
desirable solution unless the commission is able to ensure financial viability
of the utility. Responsibility of the erring officials may be fixed and suitable
action initiated as per the Act.
3. III. 4 (a): Observations of the Commission on the fund management
The Commission has observed that the utility has not utilized its funds
properly. The money which was approved to strengthen the distribution
system has been spent out to meet the current expenditure. This reflects poor
financial management on behalf of the utility. The money should be used to
create assets to reduce the AT& C losses in the system. The Commission has
estimated that the liability on account of fund diversion is Rs. 2459 crore
and should not be passed on to the consumers. The present consumers
should not be asked to pay for the mismanagement of funds by erstwhile
PSEB. Therefore, the Commission has also required Govt of Punjab (GoP)
to pay Rs. 454 core interest payment on the account of diversion of capital
funds for current purposes by PSEB.
3. III. 5: Return of Equity

The utility had claimed the Return on Equity (ROE) at the rate of
15.5% for the FY 2011-12.
Table 3.18: Annual Revenue Requirement for FY 2011-12
1
Particular

Cost of fuel
Cost of power purchase
Employee cost
R&M expenses
A&G expenses
Depreciation
Interest charges
Return on Equity
Transmission charges payable to PSTCL
Charges payable to GoP on Power RSD
Total Revenue Requirement
Less Non Tariff Income
Net Revenue Requirement
Less Revenue from Existing Tariff
Gap for FY 2011-12
Add Consolidated Gap upto FY
Consolidated Gap up to FY 2011Add Carrying Cost of Revenue
Total Gap for FY 2011-12
Energy Sales(MU)
PSERC - Tariff Order FY 2011-12

2
Proposal

3
Approval

4066.43
6349.74
3607.75
414.74
87.95
891.92
2203.27
598.86
712.03
17.71
18950.4
502.77
18447.62
14214.81
4232.81
5423.72
9656.53

3588.17
5751.26
2916.98
376.22
87.95
841.04
1066.86
366.47
491.45
17.71
15504.11
579.11
14925
14682.03
242.97
2116.69
2359.66
291.85
2651.51
35676

9656.53
36165

(Rs. Crore)
4= 3/2
Approval as a
Percentage of
proposal
88%
91%
81%
91%
100%
94%
48%
61%
69%
100%
82%
115%
81%
103%
6%
39%
24%
NA
27%
99%

However, the Commission did not approve the proposal. The

Commission had observed that since the licensee has not shown any
significant improvement in technical performance especially in improving
manpower productivity, it would be unjustified in allowing such a high rate
of return. Therefore, turning down the utility proposal, the commission
allowed only 14% as return on equity.
As shown in the Table 3.18, the licensee made proposal on the basis
of past year performance and taking the other factors affecting into account.
However, on certain items, there are significant differences between the

proposal made by licensee and final approval provided by the commission.

For example, the cost of fuel is a major cost component, has been reduced
by 12% while passing order on ARR. Similarly, huge differences have been
reported on the issue of interest charges and revenue gaps. Now, the
question arises that what would happen to these approvals if the licensee
fails to control its costs. Initially, the commission had not accepted the
licensee proposal on some issues such as interest cost etc. and the cost was
cut accordingly. However, the commission approved the same amount while
taking up the true up exercises conducted in the subsequent years.
SECTION 3.IV: SOME REGULATORY CONCERNS
3. IV.1: Quality of Information
The Punjab State Electricity Board has been filing its Annual Revenue
Requirement (ARR) for the last twelve years since March 1999. It has been
noted that the Board failed to provide the required data and information to
the commission despite year after year reminders to this effect by the
commission. This would mean, either the Board does not collect the relevant
data or is reluctant to share the information which may add to its
accountability. Commission may not let the generation, transmission and
distribution companies from abdicating from the statutory responsibility.
The Commission has stated that on scrutiny it was noticed that the ARR
was deficient in some respects and in its communication of 31.12.2010, the
Commission sought further information (from the utility). So, there is a
need to create a reliable database system so that the orders are passed on
time with acceptable degree of accuracy1.

1 PSERC - Tariff Order FY 2011-12 for PSPCL, Pg 3

3. IV.2: Budgetary Provision of Subsidy:

Another important reason for the delay in processing tariff order is the
communication gap between the regulatory commission and the state
government. The commission has to consult the state government while
fixing the amount of subsidy to be given on account of subsidized power
supply to agricultural and household consumers. However, almost every
time there was a long delay on behalf of the state government in responding
to the commission on certain matters. For example, the ARR for FY 201112, the commission asked the government to provide its views on the ARR
in relation to the provision of subsidy and other related matter such as
personnel issues on 30.12.2010. However, the government could reply only
on 19.04.2011. The commission had to wait for the government response
since its views were important on certain matters such as subsidy,
investment, employee cost etc and needed to be considered as per statute.
The state government must ensure that its reply to the PSERC is sent in time
to enable the Commission to pass its orders on ARR before 31 st March of a
year positively. However, the order for the FY 2011-12 got delayed in this
process and the revised tariff could not be implemented for the full financial
year2.

3. IV. 3: Metering of Agricultural Supply:

2 PSERC - Tariff Order FY 2011-12 for PSPCL, Pg, 5

The poor metering in agriculture segment is a major concern in

Punjab power sector. In the ARR for FY 2011-12, the company submitted
that the actual electricity consumption in the state was 21,430 MU for
metered consumers in FY 2009-10. However, for the same year, 10505 MU
was attributed to un-metered supply to agriculture sector. The un-metered
consumption in agriculture comes out to be approximately one third of the
total energy consumption. Due to lack of accurate and reliable metering in
the agriculture sector, it was not possible to estimate the consumption as
well as energy losses with any reliable degree of accuracy, especially when
there was vested interest to underreport theft and inflate agricultural
consumption. Therefore, it is recommended that the commission should
force the utility to ensure 100% metering at consumers ends.
In the absence of reliable and adequate data, the commission has to
make intelligence guesses for various regulatory parameters such as revenue
receipts, expenditures, investment, consumption etc. It also affects the
overall quality of regulatory mechanism. It has also been observed that there
was a big gap in the ex-ante estimates made by the commission and the
actual performance achieved by the utilities. Consequently, the commission
had to go for the true up excises to make the required corrections in key
regulatory parameters, which undermines the reliability of the orders of the
Commission on ARR and tariff applications.
In the tariff order for the FY 2011-12, the commission observed that
the licensee has overestimated the power consumption in the agriculture
sector. The commission rejected the estimates of electricity consumption in
agricultural sector made by the utility. The licensee had estimated 12,253
MU as consumption by agricultural sector. However, the commission

accepted its own estimate of 10843 MU as consumption in agricultural

sector for FY 2011-12, which was lower by 12% from the estimate of the
utility. The total consumption approved by the commission for various
consumer categories is given in the Table 3.19.
Table 3.19: Relative share of various consumer categories

(FY

2011-12)
Sr.
Category
Projections by Company
No
1
Domestic
8836
2
Commercial
2618
3
Industry
11187
4
Agriculture (Mainly Un-metered)
12253
5
Others*
1271
6
Total
36165
Source: PSERC Tariff Order for FY 2011-12 for PSPCL
Others includes common pool and outside states sales

Approval by
Commission
8854
2623
12197
10843
1159
35676

Relative shares
(approval)
25%
7%
34%
30%
3%
100%

Table 3.19 brings out that share of agriculture in total electricity

consumption will be 30%. Since the state government is providing free
power to agriculture sector, it has serious financial implications for the
utility as well as the state government. Firstly, it increases the financial
dependence of the company on the state government. Secondly, if the state
government is not able to provide adequate subsidy to the company, the
company would have to bear the whole burden. Thirdly, increasing cost of
power purchase from internal as well as external sources has further affected
the financial viability of the company.
SECTION

3.V:

CONCLUSIONS

AND

POLICY

RECOMMENDATIONS
Poor technical and financial performance was the main problems
faced by PSEB in the pre-reforms period. The Plant load factor of the plants
operated by PSEB was very low. At the same time, the auxiliary
consumptions and energy losses were reported unreasonably high. Further,

distorted tariff structure for various consumer categories compounded the

problems. The tariff was kept too low to recover the cost of supplying
power. Consequently, the revenue gap increased which further resulted into
the financial crisis of the Board.
Punjab was observed as one of the states initiating power sector
reforms relatively late. Punjab State Electricity Regulatory Commission
(PSERC) was constituted to regulate the power sector in the state. However,
unbundling of PSEB which was due under the provisions of the Electricity
Act 2003 was deferred for many years. It was only in 2010 when PSEB was
unbundled. The transmission business is separated from the generation as
well as distribution business.
The overall objective of power sector reform is to restore financial
viability of the electricity utilities improving the quality of service at the
consumer ends. In this regard, the role of respective regulatory body is
crucial. Apart from promoting economic efficiency, the interest of
consumers needs to be protected. The analysis shows that the power sector
in the state has shown some improvements on certain parameters such as
plant load factor, loss level and recovery of dues. However, still the utility is
suffering from the shortage of funds.
The Punjab is among a very few states in the country proving free
power supply to agriculture. Agriculture sector consumes about 30% of the
total energy in the states. Consequently, the dependency of the utility on
state government has been increasing. The state government is not providing
adequate subsidy in the form of cash. The committed subsidy is adjusted by
converting the past loan taken by PSEB into grants. This practice does not

provide any financial liquidity to the company. Another important issue is

un-metered power supply to agriculture. The poor metering is a major
barrier in the accurate estimation of energy consumption by agriculture
sector and the overall T&D losses in the state.
It is also clear from the analysis of tariff structure that there were
elements of subsidisation and cross subsidisation in the tariff structure without
any rational justification. This implies that tariff rates do not have any
systematic relationship with the cost of supply and mainly political
considerations appear to have played a dominant role in tariff setting.
Therefore, it is suggested that sincere efforts should be made comply various
provisions of the Electricity Act 2003 as well as National Electricity Policy.
The power supply to all consumers should be fully metered so that the
accountability is fixed in the system. The licensee should take measure to
improve the manpower productivity. The government should pay full
compensation in cash on account of free power supply provided to
agricultural sector.