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No. MERC/Mula Pravara/118/2003-04/0158                                                                            January 27, 2004



Shri Jayant Kawale, IAS,

Secretary (Energy)

Industries, Energy & Labour Department,

Government of Maharashtra,

Mantralaya, Mumbai 400 032.



Subject:             Findings and Recommendations relating to the viability of M/s Mula Pravara Electric Co-operative Society Limited (MPECS)




I am directed to refer to your letter No. RPT-2001/CR-1080/NRG-1 dated 6th June, 2003 on the above subject, and to forward herewith a detailed Note containing the analysis, findings, and recommendations of the Commission on the matters in respect of M/s Mula Pravara Electric Co-operative Society Limited (MPECS) referred to the Commission by Government of Maharashtra, and to summarise the Commission’s findings and recommendations as follows:


1.         Efficiency of MPECS as compared to MSEB:


            The Commission finds that MPECS’s operations are more efficient than MSEB in comparable distribution areas on key performance and service parameters such as distribution losses, collection efficiency, average billing rates, consumer receivables, operation & maintenance costs, and distribution transmission failure rates.


2.         Programme for improving viability.


            The Commission is of the view that a time bound improvement programme is essential for establishing the sustained viability of MPECS.  The components and milestones for such a programme are set out in the enclosed Note and includes inter alia, 100% metering of all consumers, reduction of distribution losses in a defined time period, targets for collection efficiency improvement, and caps on employee cost and administrative and general expenses linked with inflation. The Commission is also of the view that, in the present economic context, rural power supply requires some form of continuous assistance.  GoM may consider providing capital subsidy for installation of decentralized energy supply systems based on local resources such as baggase based co-generation, biomass based power plants, etc. by MPECS to meet its demand, which would enable self-sufficiency and long term sustainability of its operations and reduce MPECS’s dependence on GoM for revenue subsidies during the transition period.  


3.         Continuance of MPECS, viable tariff for purchase of power from MSEB, and GoM subsidy.


            Considering the superior performance of MPECS as compared to the operations of MSEB in similar areas, the Commission is of the view that MPECS should continue to operate in its supply area.  The Commission explored the possibility of MPECS continuing with its present status as a licensee or, alternatively, as a long term management contractor for MSEB, keeping in view the provisions of the EA, 2003 and the policy under consideration for rural electricity supply at the national and State levels.  On this basis, the three options that emerge are as follows:


i)          MPECS to continue as licensee with transparent direct subsidy arrangements.


            In this option, keeping in view the provisions of the Electricity Act (EA), 2003, the Commission would fix the “Fully Allocated Cost” (FAC) based Bulk Supply Tariff  (BST) at which MSEB or its successor entities would supply electricity to MPECS.  The Commission would also determine the “viable” BST on the surplus cash revenue available towards power purchase.  The difference between the FAC-based BST determined by the Commission and the “viable tariff” would have to be paid by GoM as subsidy to MPECS, subject to the performance parameters laid down in the time-bound programme for efficiency improvement.  If MPECS purchases energy over and above the permissible limit of power purchase in any specified time period, then such purchases would be charged at FAC based BST by MSEB.  Such additional costs would have to be borne and recovered by MPECS through future efficiency improvements.  It is estimated that the requirement of subsidy from GoM under this arrangement would be of the order of Rs.72 crores per annum, expected to decline progressively.


ii)         MPECS to continue as licensee with creation of Regulatory Asset.


            In this option, MSEB would be directed to supply power at the “viable tariff” to MPECS to the extent of power purchase limit as may be stipulated.  The gap between FAC-based BST and the viable tariff would be treated as a `Regulatory Asset’ in the books of MSEB (or its successor entities), to be recovered over a period of time, from MPECS.


iii)         MPECS as a Management Contractor / Franchisee.


            After considering all factors, including the financial requirements from GoM and the efficiency advantages of MPECS, the Commission finds the option of continuing MPECS as only a management contractor rather than a licensee in its present area of supply as the most tenable alternative.  All MPECS assets would be transferred to MSEB in lieu of its current dues, and MPECS would be allowed to operate as a long-term management contractor to MSEB or its successor entities for electricity distribution.  The period of contract would be that of the current MPECS license period and the entire arrangement would be secured through a formal contractual agreement.  Thus, MPECS would be compensated as a management contractor, and no BST fixation would be required.  Prima facie, this option could be implemented without resorting to the complex revocation process under Section 19 and subsequent provisions of the EA, 2003.  The 8th proviso to Section 14 of the Act enables the State Government to notify a rural area for distribution of electricity, consequent upon which the entities intending to operate in such area are exempted from requiring a license.  GoM would have to further examine the feasibility of this recommended alternative considering, in particular, the legal provisions.  It is also to be noted that if this option could be adopted, it would have universal applicability while implementing GoM's study group report on management of rural electrification.


            With regards,

Yours faithfully,

(A.M. Khan)

Secretary, MERC



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Maharashtra Electricity Regulatory Commission