Wires Business is the business of owning and operating of the distribution system, while Retail Supply Business is the business of procuring the requisite power Compendium of HPERC Regulations, March 2021 19 through longterm, medium-term, and short-term power purchase contracts for supplying to its consumers. The different components of Distribution on ARR shall be allocated to Wire and Retail Supply business in the following ratios/ basis:-
(a) Power Purchase/Transmission/SLDC- Expenses related to the Supply Business. Therefore, these should be allocated to Supply Business ARR.
(b) Employee Expenses:- Direct employees for Wires Business and Supply Business should be identified first and Employee Expenses related to these direct employees should be allocated to respective businesses. Thereafter, all common Employee Expenses relating to employees working for both the businesses can be apportioned between Wires Business and Supply Business using the allocation principles specified for apportionment of common Employee Expenses. However, till the time the segregation is complete, the Distribution Licensee may apportion the Employee Expenses between Wires Business and Supply Business using an appropriate ratio.
Universal electrification in the highly dispensed habitations involving huge network and systems and geographical and climatic conditions demand very large manpower for O&M and hence more employees are employed for Wires Business and the employees who work for Supply Business are lower as compared to Wires Business, the proportion of employee cost allocated to Wires business and Supply business may be 80:20.
(c) Repair and Maintenance Expenses:- Cost of spares, fuel etc. and cost of services related to wires business and supply business need to be separately recorded. Thus all direct R&M Expenses related to Wires Business and Supply Business may be allocated to the respective businesses. Thereafter all common R&M expenses can be apportioned between Wires Business and Supply Business using the allocation principles specified for apportionment of common R&M Expenses. However, till the time the segregation is complete, the Distribution Licensee may apportion the R&M Expenses between Wires Business and Supply Business in the ratio 95:05.
(d) Administration and General Expenses:- All expenses like rents, electricity charges, water charges, internet charges, office upkeep , insurance charges etc. relating to offices for distribution business should be allocated to Supply Business, while that relating to distribution sub-stations/receiving stations should be allocated To Wires Business. Rates and taxes, Freight, and other purchase related expenses need to be allocated based on the goods purchased – whether for Wires Business or for Supply Business. All other A&G expenses, which are common to both Wires Business and Supply Business can be apportioned using the allocation principles discussed for apportionment of common A&G Expenses. However, till the time the segregation is complete, the Distribution Licensee may apportion the A&G Expenses using the ratio 65:35.
(e) Depreciation:- Major portion of assets of Distribution Licensee would be relating to Wire Business, as sub-stations, HT and LT lines are for wheeling of electricity. Only the service connections and consumer meters, which are in the books of Distribution Licensee should be allocated to Supply Business. Thus, if asset class wise break up of assets relating to Wires Business and Supply Business are available, then depreciation relating to direct assets of Wires Business and direct assets of Supply Business should be allocated to respective businesses. Depreciation on any common asset, if 20 Compendium of HPERC Regulations, March 2021 any can be apportioned between Wires Business and Supply Business using the allocation principles discussed for apportionment of common depreciation. However, if only the overall asset break-up between Wires business and Supply business is available, then the depreciation has to be apportioned in the same ratio. Till the time the segregation is complete, the Distribution Licensee may apportion depreciation for distribution business in the ratio 95:05.
(f) Interest on Loans:- All new loans availed by the Licensee should be separate for Wires Business and Supply Business, based on the funding of the assets for Wires Business and Supply Business. In this way, interest on loans for Wires Business and Supply Business will be clearly identifiable and these should be allocated to respective businesses. Other interest charges, which are common to both Wires Business and Supply Business should be apportioned using the allocation principles discussed for apportionment of common Interest and Finance Expenses. However, till the time the segregation is complete, the Distribution Licensee may apportion interest on loans between Wires Business and Supply Business in the ratio 95:5.
(g) Interest on Working Capital:- All new Working Capital loans availed by the Distribution Licensee should be separate for Wires Business and Supply Business. In this way, interest on Working Capital loans for Wires Business and Supply Business will be clearly identifiable and these should be allocated to respective businesses. Other interest on Working Capital which are common to both Wires Business and Supply Business can be apportioned using the ratio 05:95, as major portion of Working Capital loans belongs to supply business.
(h) Interest on Security Deposit:- Security deposits are collected by Distribution Licensees from the consumers for supplying electricity to them, hence, the interest on Security Deposits should be allocated entirely to the Supply Business.
(i) Provision for Bad Debts:- Major part of bad debts relates to supply business and hence may be allocated to the Supply Business 05:95.
(j) Return on Equity:- RoE for both the businesses should be allowed based on the Equity invested separately for both the functions. Common RoE, if any should be apportioned between Wires Business and Supply Business using the allocation principles discussed for apportionment of common RoE. In case equity invested for both the functions cannot be segregated clearly or till the time the segregation is complete, RoE can be apportioned between Wires Business and Supply Business using the proportion of GFA between Wires Business and Supply Business or using a suitable ratio 100:00.
(k) Income Tax:- Tax is a function of profit earned, i.e. return of a business, therefore, it should be apportioned on the basis of RoE related to Wires Business and Supply Business, as discussed for apportionment of Income Tax.
(l) Non Tariff Income:- Non Tariff Income resulting from meter rent, delayed payment charges, service connection charges etc. should be allocated to Supply Business, while income resulting from sale of scrap etc. should be Compendium of HPERC Regulations, March 2021 21 allocated to Wires Business. Other common items of Non-tariff Income, if any can be apportioned using the allocation principles specified for apportionment of revenues. However, till the time the segregation is complete, the Distribution Licensee may apportion the Non-Tariff Income between Wires Business and Supply Business using the ratio 0:100.