Performance Measurement of Power DISCOMS

A

Report for

Conducting a study on Performance of Distribution

Utilities

Summary Report

by

Manpreet Singh Management Trainee-Energy Division Feedback Infra Private Ltd., Gurgaon

Study on Performance Measurement of Distribution Utilities

A Report by Manpreet Singh

Acknowledgement I take the opportunity to express my profound gratitude and deep regards to my guide Mr. Saurabh

Srivastava (Consultant Feedback Infra Pvt Ltd.) for his exemplary guidance, monitoring and

constant throughout the course of project. The blessing, help and guidance given by him time to

time shall carry me a long way in the journey of life on which I am about to start.

I also take the opportunity to express a deep sense of gratitude to my company named Feedback

Infra Pvt Ltd. And the members of the company who helped me in making this project a successful

endeavor.

Last but not the least; I would like to thank my parents for their support at each and every stage

which has helped me to great extent during my educational career.



CONTENTS Executive Summary ................................................................................................................................................................ 4

Introduction ............................................................................................................................................................................. 5

Methodology Adopted ........................................................................................................................................................ 6

Analysis & Calculations ..................................................................................................................................................... 8

Introduction of Key Performance Indicators ...................................................................................................... 8

KPIs (financial) ............................................................................................................................................................. 8

Justification of KPI ...................................................................................................................................................... 9

Categorization of DISCOMs ............................................................................................................................................ 12

Weight Determination.................................................................................................................................................. 14

Key Parameters .......................................................................................................................................................... 14

Weights of Key Parameters ................................................................................................................................. 15

Based upon key parameters, the DISCOMs under consideration can be grouped into 5

categories. Category A is best performing and Category B means poor performing. .............. 15

Key Observations for all the five categories can be summarized in the table as follows: .......... 16

Key Findings and Recommendations ...................................................................................................................... 17

Bibliography ............................................................................................................................................................................ 18



EXECUTIVE SUMMARY The objective of the study is to help the students related to the topic “Study on Performance of

Distribution Utilities in the Power Sector”. The title “Performance of the Distribution Utilities all

over India” is just taken as one of the critical case as the overall analysis of the utility is very much

required in order to check the performance.

The main reason of writing this report especially for the students of the UPES is that I just want to

let them know that what type of work they have to carry out if they got the chance to work in a

consultancy. In a consultancy firm, specially working for a client i.e. any of the Power DISCOM, this

type of analysis is of utmost importance. You will be required to go through the balance sheet of

the company of consecutive years or from the annual audited accounts, to get the data out of it to

carry out the analysis. Preparation of ARR (Annual Revenue Requirement) & True-Up etc. are the

very common exercises which you all need to carry being a consultant for the distribution company.

The report is prepared in such a way that students can easily understand that what are the

components of accounts and finance which are required to be checked in order to carry out the

performance analysis of the distribution utilities of Power Sector.

Key Performance Indicators which are required to be checked are clearly shown in the tabulated

form. Key Performance Indicators are segregated into two types namely financial Indicators and

Operational Indicators. Categorization of the DISCOMs is done on the basis of main four parameters

i.e. Profitability, Solvency, and Techno-Commercial Efficiency. On the basis of this, DISCOMs are

classified into five major categories and their explanation is provided in the report. A weightage is

given to each and every single key parameter to get the best conclusion out of it.

Students before going through the report must brush up their basic concepts of accounts & finance

for the better understanding of the work done in the report. Being the MBA graduates, students

must focus on the concept of finance and accounts very stringently else in future it can act as an

hurdle in the path of your success.



INTRODUCTION

The most critical component of infrastructure is Power or Electricity which has a direct effect on

the economic-growth and well- being of the country or nation. Power Sector of India is known to be

the diversified sector among all other sectors. In order to promote the sustained industrial growth

of country, the government of India has identified the Power Sector as one of the important key

factor to focus.

Viability of any of the sector is the primary concern, whether it is Power Sector, Oil & Gas, Aviation,

Logistics or anything. The entire viability in case of the Power Sector depends upon the operational

efficiency & financial health of the distribution utilities. Distribution companies provide the last

mile connectivity (LMC) in the electricity sector. So, this function of distribution utilities or

DISCOMs acts as a crucial link in the electricity chain. Therefore, focusing much on the activities like

improving the performance of the DISCOMs, especially the utilities which are government owned, is

of primary concern and is required to be taken carefully.

In order to supply the adequate power to all the citizens, it is very necessary for a country to bring a

drastic radical change i.e. reduction in the aggregated technical & commercial (AT&C) losses. The

reorientation of the operational procedures of the utilities is another main concern which is

required to be implemented for the betterment of the sector. Factor which is very crucial & plays

the major role in bringing the success of reforms in the Power Sector is restoration of health of

distribution sector. A study can be carried out to check the performance of distribution utilities or

distribution companies and an analysis can be made on that specific study to check the impact of

the various policy/regulatory decisions on the performance of the distribution utilities. In order to

carry out the study to check the performance of any of the DISCOM, various financial and

operational KPIs (key performance indicators) are required to be identified and a comprehensive

assessment of performance is needed.



METHODOLOGY ADOPTED

DISCOMs can be compared and rated on the basis of 4 constructs and 12 parameters and then can

be grouped into 5 categories. Four major constructs are as follows:

Profitability

Channel Efficiency

Solvency

Techno-Commercial Efficiency

On the basis of all these above mentioned constructs, these parameters have been selected namely

as follows:

Gross Margin without Subsidy

Profit per unit procured

Difference in CAGR between Revenue & Expenses

Number of day’s receivable

Number of days of payable

Interest Service Coverage Ratio

Debt-Equity Ratio

AT&C losses

Employee cost per unit energy

After carrying out this mechanism, the relevant gap in the performance of DISCOMs can be

identified and appropriate measures/mechanism can be suggested in order to enhance the efficacy

of the utilities. The use of this categorization is basically for the purpose of focusing on the following

two things:

Stimulating the Financial Performance

Improving the Financial Performance

Each KPI has an impact on the performance of the distribution utilities. So, the importance of each &

every KPI can be derived accordingly and weightage can be given to each and every individual

factor, by the virtue of which the easy analysis can be made that which KPIs is most critical and

which is least critical.

These findings can be compared with National Level Estimates in order to check the difference and

also to measure the efficiency & performance of DISCOMs respectively. Past analysis and

experiences has shown that following things are required in order to improve the financial

performances of distribution utilities:

Reducing Transmission Losses

Reducing Distribution Losses

Timely Tariff Hike

Time bound recovery of Regulatory Assets



Financial Position can be improved after the unbundling of generation, transmission and

distribution companies.

Restoration of health of the distribution sector remains critical to the success of reforms in the

power sector. Operational and Financial performance of DISCOMs has been a major concern. As per

the Shunglu Committee Report, DISCOMs suffered financial losses of INR 1, 79,000 crore before

subsidy and INR 82,000 crore after subsidy during 2005-2010. The main reasons of these losses

were high AT&C losses, rising cost of power purchase with more expensive short-term power,

interest payments, etc. Aggregate losses(without accounting for subsidy) for all the utilities

increased from INR 64,463 crore in 2009-2010 to INR 92,845 crore in 2011-12. Poor Billing &

Collection, high level of distribution losses, increasing cash losses, poor financial management are

reported to be plaguing the performance of the distribution companies.

ACS-ARR Gap: The Shunglu Committee has reported an average gap between average cost of supply

and average revenue realization of INR 0.60 kWh of electricity sold by utilities in FY10. The gap can

be attributed to the operational inefficiencies of DISCOMs and their inability to raise tariffs in line

with increase in costs.

High Technical & Commercial Losses: The country losses almost 27 %( 2011-12) of electricity

generated in the form of AT& C losses. A significant part of these losses can be attributed to theft

and issues related to meter reading and billing. Over the past, there has been a reduction in AT& C

losses in the country.



ANALYSIS & CALCULATIONS

INTRODUCTION OF KEY PERFORMANCE INDICATORS

KPIS (FINANCIAL) The list of key performance indicators used to carry out the study of performance of various

DISCOMs is shown below:

Gross Margin (%) (Total Revenue – Power Purchase Cost)/ Total Revenue

Gross Margin without subsidy (%) (Total Revenue–Power Purchase Cost– Subsidy Booked)/ Total Revenue

Net Profit Margin (%) Profit After Tax/Total Revenue Net Profit Margin(without subsidy) Profit After Tax(without subsidy)/Total

Revenue(without subsidy) Current Ratio

Receivables (no of days) 365/(Revenue from sale of power/Average Account Receivables)

Payables(no of days) 365/(Cost of purchase of power/ Average Account Payables)

Debt/Equity (Long Term Debt + Short Term Debt)/Net Worth*

Interest Coverage Ratio (PAT + Depreciation + Interest Expense)/ Interest Expense

Debt Service Coverage Ratio (PAT + Depreciation + Interest expense)/(Interest + Principal Payment due in the year)

ROE (%) Profit After Tax/Net Worth*

ROCE (%) Profit After Tax/Capital Employed*

ROA Profit After Tax / Total Asset Fixed Asset Coverage Ratio Net Fixed Asset/Total Debt

Where

Net Worth = Equity + Reserves +Accumulated Profits, Losses – Miscellaneous expenses not written

off

ANTW = Equity + Reserves – Miscellaneous expenses not written off – loan &advances to

subsidiaries



JUSTIFICATION OF KPI KPI(Commercial/Operational) Formula Justification

No of units sold/Sq. Km No of units sold/No of consumers Per capita consumption Revenue Revenue from sale of power/Total Revenue

Measure of operating revenue

Revenue from Unmetered sale/Total Revenue

Measure of unaccounted units of sale of power

Revenue from Trading/Total Revenue

Measure of trading revenue

Revenue from Others/Total revenue

Exceptional revenue component

Consumer Mix(electricity billed)

Measure of consumer composition

Domestic (in %) Domestic unmetered (in %) Commercial (in %) Industrial HT (in %) Industrial LT (in %) Industrial (in %) Agricultural (in %) Agricultural unmetered (in %) Public lighting (in %) Public works (in %) Bulk Supply (%) Railway (%) Interstate (%) Others (in %) Category wise average tariff realization

Category wise tariff reflecting cost of supply in order to assess level of cross-subsidization

Domestic sales/No of domestic units sold

Commercial Sales/No of commercial units sold

Industrial sales/No of Industrial units sold

Agricultural sales/No of agricultural units sold

Average Tariff Total revenue(excluding subsidy)/No of units purchased

Category wise Av. Tariff(sales per unit) w.r.t (Av. CoS)

(Power Cost + O&M + Interest + Depreciation + other costs)/ No of units purchased

Measure of efficiency of business operation

Domestic avg. tariff (in % of avg.



COS) Commercial avg. tariff (in % of avg. COS)

Industrial avg. tariff(in % of avg. COS)

Per unit measure of cost of supply in terms unit sold

Agricultural avg. tariff (in % of avg. COS)

Average tariff (in % of avg. COS) Measure of revenue gap Average cost of supply per unit of power purchased

Measure of revenue gap

Power purchase cost/unit of energy sold

Measure of revenue gap

O&M/unit of energy sold Measure of revenue gap Depreciation/unit of energy sold

Measure of purchase composition from different sources

Interest/unit of energy sold Others/unit of energy sold Difference between avg. tariff and avg. COS

Regulatory asset created during the year

Commutative regulatory asset at the beginning of the financial year

Change in regulatory asset (in %) Power purchase(electricity procured)

Central sector (in %) IPP (in %) State Sector (in %) Renewable Energy (in %) Others (in %)

Measure of power purchase optimization

Means of procurement (electricity procured)

Long-Term PPA (in %) Short-Term bilateral &trading (in %)

Short-Term trading through exchange (in %)

Unscheduled interchange (in %) Power Purchase Cost Central Sector/unit procured IPP/unit procured State Sector/unit procured Renewable Energy/unit procured Others/Unit procured Means of procurement(cost) Long-Term PPA/unit procured Short-Term bilateral & trading/unit procured



Short-Term trading through exchange/unit procured

Total Power purchase cost/unit procured

Grant & Subsidies Subsidy Booked/Subsidy Received

Measure of Realization of Subsidy Received/unit sold to subsidized consumers

Booked/unit sold to subsidized consumers

Domestic Subsidy/Unit Sold Level of Domestic Subsidy per unit

Agricultural Subsidy/Unit Sold Level of Agricultural Subsidy per unit

Subsidy/Revenue from sale of Power

%age of subsidy provided w.r.t revenue

AT&C Loss (%) (Net Input Energy – Energy Realized)/Net Input Energy

Measure of composition of losses

T&D Loss Billing Efficiency No of units sold/No of

input energy units

Collection Efficiency No of unit realized/No of unit sold



CATEGORIZATION OF DISCOMS

The DISCOMs under consideration were compared against each other and rated based on 4 constructs and related 12 parameters and grouped into five categories. The constructs are Profitability, Channel efficiency, Solvency and Techno-commercial efficiency. Based on these four constructs, 12 parameters have been decided. Effort has been made to ensure that the parameters of a construct are mutually exclusive and collectively exhaustive.

Profitability: Three parameters have been selected which measure the profitability of DISCOMs namely

a) Profit per unit input energy: Profit per unit input energy normalizes the profit of a DISCOM and therefore the DISCOMs can be compared against each other

b) Gross margin without subsidy: Subsidy booked is already included in profit per unit input energy, therefore, it has been adjusted while calculating the gross margin

c) Difference in compound annual growth rate of Revenue and cost: It considers the growth pattern of revenue and expenses in last four the years.

Channel Efficiency: Three parameters have been selected which measure the Channel

Efficiency of DISCOMs namely

a) Number of days of receivable: Since major receivable for a distribution company is with consumers, therefore number of day’s receivable represents collection period for DISCOM.

b) Number of days of payable: Since major payable for a distribution utility is related to power purchase; therefore number of days of payable represents the dues paying pattern of DISCOMs for purchasing power.

c) Ratio of Capex and Depreciation: It indicates whether Distribution Company is adding assets at the rate greater than it depreciates.

Solvency: Three parameters have been selected which measure the Solvency of DISCOMs

namely

a) Interest service coverage ratio: It is a measure which determines how easily a company can pay interest on outstanding debt. Negative Interest service coverage ratio has been realized owing to negative EBIT

b) Debt to equity ratio: It is the measure of financial leverage. Higher Debt leads to unfavorable capital structure and increases the probability of default. Negative Debt to equity ratio has been realized because of negative equity which gets depleted owing to persistent losses.

c) Fixed Asset Coverage Ratio: It determines the ability of utility to cover debt obligations with its assets after all liabilities have been satisfied. However market value of the assets of a distribution company is difficult to determine.

Techno-Commercial efficiency: Three parameters have been selected which measure the Techno commercial efficiency namely



a) Aggregate technical and commercial losses: It is the measure of technical and commercial efficiency of electricity distribution business. Collection efficiency has not been taken as separate parameter as it is already factored in AT&C losses.

b) Employee cost per unit input energy (regular employee): It indicates man power efficiency of the utility

c) Trend of AT &C losses: Improvement or deterioration in AT&C losses is captured as a separate parameter. It is a parameter which also captures the sustainability in operation.



WEIGHT DETERMINATION A combination of three methods can be used to determine the weights for different parameters for comparing the DISCOMs. These methodologies are statistical methods, using the weights of rating agencies, and taking the opinion of experts. Finally the weights were determined against the different Parameters which are indicated in the table below: Based on above twelve parameters, a consolidating rating is given to the DISCOMs under consideration. The weights assign to twelve

parameters are as follows:

KEY PARAMETERS

Profitability Channel Efficiency Solvency Techno-Commercial Efficiency

40% 15% 25% 20% Gross

Margin Without Subsidy

Profit Per unit

Input energy

Difference in CAGR

b/w Revenue &

Growth

No of days of

Receivable

No of days of payable

Ratio of CAPEX &

Depreciation in the year

Interest Service

Coverage Ratio

Debt of

Equity ratio

Fixed Asset

Coverage Ratio

AT&C Losses

Employee cost per

unit input energy

AT&C Loss

Trend

15% 15% 10% 7.5% 2.5% 5% 7.5% 12.5% 5% 7.5% 7.5% 5%



WEIGHTS OF KEY PARAMETERS

BASED UPON KEY PARAMETERS, THE DISCOMS UNDER CONSIDERATION CAN BE GROUPED INTO 5 CATEGORIES.

CATEGORY A IS BEST PERFORMING AND CATEGORY B MEANS POOR PERFORMING.

Category A Category B Category C Category D Category E Very High financial and operational performance capability

High to moderate financial and operational performance capability

Moderate to below average financial and operational performance capability

Below average to low financial and operational performance capability

Low to very low financial and operational performance capability



KEY OBSERVATIONS FOR ALL THE FIVE CATEGORIES CAN BE SUMMARIZED IN THE TABLE AS FOLLOWS:

Category A

Consistent track record of profitable growth- Profit per unit positive for all DISCOMs from FY2010 to FY2013

Cost reflective tariffs- Difference between tariff and average cost of supply is either positive or marginally negative

Comfortable capital structure- Debt to Equity ratio below 1 for all DISCOMs

AT&C losses less than 15% for all DISCOMs

Healthy cash collection from consumers, collection days less than 45 for all DISCOMs

Category B

Profit per unit above (0.25) paisa for all DISCOMs

AT&C losses below ~ 30%

High leverage level, net worth positive for all DISCOMs

Difference between tariff and average cost of supply is either positive or marginally negative

Moderate to high receivable days

Category C In between Category B and Category E

Category D

Category E

Profit per unit highly negative for all DISCOMs

High AT&C losses (above 30% for all DISCOMs)

Negative net worth resulting in adverse capital structure, Debt to Equity ratio negative for all DISCOMs

Difference between tariff and average cost of supply is negative and gap is above Rs 1.5

Significantly stretched receivable and payable days



KEY FINDINGS AND RECOMMENDATIONS

Relatively highly rated entities such as power distribution entities score favorably in parameters such as timely submission of audited financials, quality of accounts, effective regulatory environment prevalent in the state etc.

Agricultural consumers benefit from electricity subsidies provided by the States but these consumers remain unmetered in many cases. Separating the feeder to irrigation pumps from other uses with assured electricity supply during the stipulated hours can contain excessive electricity consumption. In the case of low-income households that enjoy subsidized electricity which remain unmetered, prepaid meters can regulate their power consumptions.

DISCOMs in most of the States are incurring massive losses due to increasing, unchecked regulatory assets. It is necessary that the States explore ways to liquidate them in a time-bound manner without further procrastination.

The regulatory commissions need to devise ways to keep the State governments at arm’s length from the State utilities. The governments should attempt to attract greater participation of private DISCOMs.

Autonomy of the State Electricity Regulatory Commission has remained elusive in reality. Scopes to revamp the current regulatory structure may be explored with the aim to keep the State government at arm’s length from the tariff-setting exercise.

Many State Regulatory Commissions realized that few objections related to tariff rationalization have

being raised by stakeholders during the public hearing. Therefore, Regulatory commissions should sensitize the consumers about the rationale of tariff setting and inform them before every tariff revision.

Many at times the tariff rationalization could not be possible owing to political factors. This further ceases the objectivity and power of State Regulatory Commission. Therefore, political will of the governments (i.e., State and Central) is essential to overcome many of the challenges.

It is necessary that the current monopolized structure of the distribution sector be reformed and competition be encouraged. One of the ways to manifest this is to separate carriage and content businesses of the distribution segment.

PROBABLE CHALLENGES FOR THE DISCOMS CAN BE SUMMARIZED IN THE FOLLOWING MATRIX:

Desired Timeline/Challenge Short-Term Mid-Term Long-Term

Low Completion of Feeder

Segregation

Consumer Sensitization

Computer Based Segregation of Account

Medium Prepaid Meters

Regulatory Reform

High

Liquidating Regulatory Assets

Distribution Franchise

Separation of Carriage and Content Business



BIBLIOGRAPHY Ernst & Youngs. (2015). Performance of Distribution Utilities , Forum of Regulator Report.

regulator, F. O. (2014-15). Study on Performance of Distribution Utilities. (pp. 1-33). Ernst & Young's.

Srivastava, S. Discussion with consultants.

Performance Measurement of Power DISCOMS

Documents

Transcript of Performance Measurement of Power DISCOMS