Presentation on TCM in Pricing of Electricity - Revised Final · 2016. 8. 17. · Title: Microsoft...

Total Cost Management in the Pricing of ElectricityCMA National Management Accounting ConferenceJuly 11 - 13, 2016 | Colombo, Sri Lanka

Mohammad Iqbal Ghori, FCMA President, ICMA Pakistan

Total Cost Management (TCM) & Public Sector

12-Jul-2016Institute of Cost & Management Accountants of Pakistan 2

Total Cost Management (TCM) is one of the most powerful tools to help public sector organizations to efficiently and effectively understand the resources needed and consumed related to goals, mission and outputs; to utilize resources; to increase transparency, to expand constituent services; to control, reduce and eliminate costs throughout the value chain and to improve performance hence standing out to compete in a global environment.

TCM in Electricity SectorThe application of management accounting techniques in the electricity sector:

Stakes of all society including existing & future consumer, industry, Government, regulators, investment; Setting prices and regulate tariff in the areas of generation, transmission, distribution and consumption; Developing a flexible cost allocation; Distribution loss and inefficiency gap analysis through traceability models; Setting power business rules ; Model validation reporting; Hierarchy and dimension management ; Multi-dimensional costing calculations; Powerful analysis and reporting; Integration with other systems; Un-disciplined consumer


Natural Monopoly – Stakeholders interest1. Regulated business2. There is a continuous network requirement3. Electricity is a non-storable output4. The demand for electricity keeps changing on continuous basis5. Judicious passing thru of legitimate cost to end consumer


Supply Chain of ElectricityGe

nerat

ion

Distrib

ution

Transm

ission

Consu

mption


Electricity Regulatory Authorities in SAARC countriesCountry Name of Authority Year of Establishment Pakistan National Electric Power Regulatory Authority (NEPRA) 1997India Central Electricity Regulatory Commission (CERC) 1998Bangladesh Bangladesh Energy Regulatory Commission (BERC) 2003Sri Lanka Public Utilities Commission of Sri Lanka (PUCSL) 2002Nepal Nepal Electricity Authority (NEA) 1985Bhutan Bhutan Electricity Authority (BEA) 2001

Source: Websites of Regulatory Authorities


Challenges of SubsidiesThe energy subsidies normally have a direct impact over the national exchequer as it leads to a worsened fiscal balance due to larger government expenditures, smaller revenues, or net current transfers. Subsidies also affect the long-term growth potential of any economy.


Pakistan Electricity Sector Structure The Power sector was restructured in 1998 with the creation of PEPCO(Pakistan Electric Power Company. Prior to 1998, there were two vertically integrated utilities, i.e, KESC (now KElectric), which served the Karachi area and WAPDA which served the rest ofthe country. Later on, WAPDA’s power wing has been structured into distinct corporateentities comprising of 4 GENCOs, 10 DISCOs and one TransCO (NTDC).


Power Companies Organizational Components


Power Supply Chain


Creation of NEPRANational Electric Power Regulatory Authority (NEPRA)

was created under the NEPRA Act 1997 to protect consumer interests in the area of electricity provision, and to ensure an efficient and competitive environment for the electricity generators and distributors.


Tariff Structure in PakistanThe current tariff structure is based on rate of return or cost of service. It determines prices charged so as to achieve revenues that cover all legitimate operating and capital costs while providing the Company with a fair rate of return on its capital employed.


Annual Revenue Requirement Annual Revenue Requirement is determined by NEPRA and is recovered from consumers on the basis of their weightage.

ARR = PPP + DM + PYAAverage Tariff = Annual Revenue RequirementTotal Estimated Units Sales


Tariff FormulaAnnual Revenue Requirement = PPP + DM + PYA

PPP = (EPP + CPP + UoSC) Distribution Margin (DM) = O &M + ROA + DEP – Other Income

Average Tariff = Annual Revenue RequirementTotal Estimated Units Sales


Average End User TariffThe average end user tariff is the tariff charged to the end consumer after deducting a certain portion of subsidy allowed by government. Tariff structure is consistent throughout the country but is (besides cross subsidies) divided by consumption levels (tariff slabs). Tariff charged to the end consumer is equal to :

Power Purchase Price (Adjusted) Distribution Margin (DM)

PYATDS/Subsidy

Govt. Taxes/Surchage12-Jul-2016Institute of Cost & Management Accountants of Pakistan 15

Revenue Requirement“Revenue Requirement” consists of:1. Power Purchase Price including impact of T&D Losses (Adjusted PPP)2. Distribution Margin; and 3. Prior Year’s Adjustment/Un-recovered Prior Year Cost


I) Power Purchase Price (PPP)Power Purchase Price (PPP) includes:1. Energy Transfer Charges (ETC)2. Capacity Transfer Charges (CTC)3. Use of System Charges (UoSC)/Wheeling Charges


Energy Transfer Charges (ETC)ETC is the average monthly/annual purchase price of different sourcesof generation as given below:1. Hydel2. Coal3. HSD4. F.O5. Gas6. Nuclear7. Wind etc.


Power P

urchas

e Price

(PPP)

Capacity Transfer Charges (CTC)This is the cost (fixed) based on monthly/annual peak demand and calculated as under:

Rs./kW/Month


Power P

urchas

e Price

(PPP)

Use of System Charges (UoSC)/Wheeling Charges This cost covers the operating and capital cost of the transmission net work and calculated as under:

Rs./kW/Month


Power P

urchas

e Price

(PPP)

Monthly Fuel Adjustments of PPPMonthly Fuel Adjustments refers to the variation in reference and actual fuel cost component of PPP on monthly basis.


Power P

urchas

e Price

(PPP)

Quarterly Adjustments of PPPAdjustments pertaining to capacity and wheeling / transmission charges, Impact of T&D Losses, impact of extra or less purchase of units.


Power P

urchas

e Price

(PPP)

Adjusted PPPIn calculating the final tariff, the PPP adjusted for overall distribution & transmission losses to yield the retail tariff. The same will be passed on to final consumers.

Adjusted PPP = Unadjusted PPP / (1-Losses %)


Power P

urchas

e Price

(PPP)

II) Distribution Margin (DM)The Distribution Margin is the cost incurred for maintenance and expansion of distribution network of the company which consists of the following: Prudently incurred operating cost. Return on existing assets and new investments Depreciation. Other Income (Adjusted against the DM)


Distribu

tion Ma

rgin (DM

)

Distribution Margin (DM) FormulaAverage Margin, (Rs./kWh)

(O & M + ROA + Depreciation) - Other Income=

Total Unit Sales


Distribu

tion Ma

rgin (DM

)

Distribution Margin (DM) FormulaROA =

Regulatory Assets Base * WACC


Distribu

tion Ma

rgin (DM

)

PYAUn-recovered / over-recovered PPP

Un-recovered / over-recovered DM

Consumer Mix Variance

Un-recovered / over-recovered PYA

III) Prior Year’s Adjustment (PYA)This is the un-recovered cost of service relating to previous year and calculated as under.


Prior Ye

ar’s Ad

justme

nt (PYA

)

Recovery of Revenue Requirement from Consumers Variable Portion (95-96%)

Charged to consumers on the basis of weightage assignedto each consumer category on actual/per unit consumption(kWh) basis. Fixed Portion (4-5%)

on the basis of MDI (kW/Month)


Prior Ye

ar’s Ad

justme

nt (PYA

)

Multi Year Tariff (MYT) MYT is determined for a period of more than one year. The tariff determined for the first year is based on actual (past year)and estimated (future periods) results. The tariff so determined is made reference for the remaining controlperiod of MYT with adjustment mechanism for differentcomponents of RR and DM to cater for the inflationary impact.

Average Sale Rate for next Year =ASR(Previous Year) + Overall variation in PPP + Annual O&M Adjustment +RORB Adjustment +Depreciation Adjustment – Other Income


Prior Ye

ar’s Ad

justme

nt (PYA

)

Multi Year Tariff (MYT) PPP Adjustments

The reference PPP is adjusted with actual to cater the variation in prices. Monthly Fuel Adjustments Quarterly PPP Adjustments

O&M Adjustment =O&M 1 = TO&M0 * [ 1 + (CPI – X )]O&M 1 = O&M for the current tariff yearO&M 0 = O&M for the previous yearCPI = Change in Consumer Price IndexX = Efficiency Factor


Prior Ye

ar’s Ad

justme

nt (PYA

)

Multi Year Tariff (MYT) O&M Adjustment

O&M 1 = TO&M0 * [ 1 + (CPI – X )]O&M 1 = O&M for the current tariff yearO&M 0 = O&M for the previous yearCPI = Change in Consumer Price IndexX = Efficiency Factor


Prior Ye

ar’s Ad

justme

nt (PYA

)

Multi Year Tariff (MYT) RORB Adjustment

RORB 1 = TRN0 * RABa1 / RABa0RORB 1 = RORB for the current tariff yearTRN 0 = Tariff attributable to return on rate base for the previous yearRABa0 = Regulatory Assets Base for the previous yearRABa1 = Regulatory Assets Base for the current year


Prior Ye

ar’s Ad

justme

nt (PYA

)

Multi Year Tariff (MYT) Depreciation Adjustment

TD8 * AGFAIOA8 / AGFAIOA7TD 1 = TD0 * AGFAIOA1 / AGFAIOA0TD 1 = Tariff attributable to depreciation for the current tariff yearTD 0 = Tariff attributable to depreciation for the previous yearAGFAIOA1 = Average Gross Fixed Assets in operation for the current yearAGFAIOA0 = Average Gross Fixed Assets in operation for the previous year


Prior Ye

ar’s Ad

justme

nt (PYA

)

Challenges faced by NEPRA / Regulators Cost of Service Study Elimination of Cross Subsidy Open Market while safeguarding the interest of all stakeholders Determine the terms and conditions of electricity services by

generation, transmission and distribution companies Segregation of controllable and uncontrollable cost Un-disciplined Consumers Prescription of technical standards and other related issues Monitor electricity distribution and supply services to consumers


Provision of electricity on a non-discriminatory basis to all consumers but on affordable price Setting KPI in line with Tariff Cost Accounting records Interest of Future Consumers

Suggestions / Solutions Develop tariff model for all stakeholders; Identify controllable and uncontrollable costs to regulate sector wisely; Implement performance standards; Devise solid mechanism and methodology to deal sector’s disputes i.e., KESC vs CPPA; Discipline the consumer thru pricing; Develop transparent, predictable and cost reflective tariff; Initiate orientation programs for energy conservation by setting of targets; Devise method to reflect payment or non-payment of government subsidies into consumer end tariff;

Devise policy to specially treat PESCO, HESCO , QESCO and KESC; Set realistic targets for efficient and inefficient operators; Consider phasing-out cross-subsidies and it complete elimination over a specified period of time; Protect existing and future consumer while adding new generation and approving any ambitious investment plan e.g., ERP , smart meters, smart grid, etc.; Undertake Regulatory Audit for selective operators; Build its capacity through induction of professionals, especially, Management Accountants; Timely determine and notify tariff; Hold dialogues with the community to create awareness for consumers’ rights;


Multi-dimensional Role of Management Accountants in reducing demand-supply power Gap in Pakistan


Role of Management Accountants in Power Sector Ensuring the recover of legitimate cost and ROA through consumer end tariff Corporate Planning & Control Legitimate cost based tariff Engagement of regulators for rational tariff Development of customized tariff Cost Audit of Electricity Generation Companies Controlling Inefficiencies of DISCOs Commercial oriented policies to run DISCOs on commercial basis Revamping of Electricity Bill Collection system Resolving Circular Debt issue


Role of Management Accountants in Power Regulating Agency


Cost Audit Integrated Reporting Segregation of controllable and uncontrollable cost To formulate tariff methodology To set KPI Cost Accounting Records for all stakes holder To develop consumer manual and other important codes Discipline consumer thru pricing

Role of Management Accountants in Courts The courts may bring judicial reforms in following ways: Knowledge partner with courts By empowering the regulators but accountable to have reliable decisions By setting up sector specific Courts By setting up Consumer Courts to hear complaints of general public on energy issues


Role of Management Accountants in Industry Saving of one Kwh is better than new generation Management Accountant is an ambassador of Energy Conservation Controlling Energy costs in production process Taking corrective measures to maximize production with minimal cost Cost Accounting Records to have benchmarking


Role of Management Accountants for Consumers Personal Social Responsibility (PSR) Awareness about the Protection of Consumer Rights Cost of Service Study by Management Accounting Bodies Participation in regulatory process to protect consumer rights


Conclusion Electricity tariff and rate making Determination of Cross Subsidy Setting of Tariff Differential Subsidy Mechanism Financial and Strategic Planning P&L Management, Performance Management Corporate Planning & Strategic Dialogues with all stakeholders Auditing and Compliance

Operating and Working Capital Budget Development and Management Restructuring Cash Flow Management Business Modeling Business Valuations Project Management Operational and Commercial Business

Process Re-engineering


The management accountancy has a multi- dimensional role as follows:

Institute of Cost & Management Accountants of Pakistan 12-Jul-2016 43

Presentation on TCM in Pricing of Electricity - Revised Final · 2016. 8. 17. · Title: Microsoft...

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