Central Electricity Regulatory Commission
National Thermal Power Corporation ... vs Uttar Pradesh Power Corporation Ltd. ... on 15 October, 2007
ORDER
1. This petition has been filed by the petitioner, a generating company owned or controlled by the Central Government for approval of tariff in respect of Rihand Super Thermal Power Station, Stage - II (2 x 500 MW) (hereinafter referred to as "the generating station") for the period 15.8.2005 to 31.3.2009, based on the Central Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations, 2004, (hereinafter referred to as "the 2004 regulations"). The petitioner has also sought reimbursement of expenditure towards publishing of notices in the newspapers and the petition filing fee. No other specific relief is prayed for.
2. The generating station comprises two units, each with capacity of 500 MW. The scheduled and actual dates of commercial operation of the units are as under:
Scheduled date of commercial operation as per board approval.
Actual date of Commercial operation Unit I Feb, 2006 15.8.2005 Unit II Nov, 2006 1.4.2006
3. The details of the fixed charges claimed by the petitioner are given hereunder:
Particulars 15.8.2005 to 31.3.2006 2006-07 2007-08 2008-09 Depreciation 5546 10165 10165 10165 Interest on Loan 8066 13828 12561 10630 Return on Equity 6329 11729 11729 11729 Advance Against Depreciation 1582 0 9383 9383 Interest on Working Capital 1549 2953 3127 3118 O & M Expenses 4865 10120 10520 10950 TOTAL 27936 48795 57485 55975
4. The details of working capital furnished by the petitioner and its claim for interest thereon are summarised hereunder:
15.8.2005 to 31.3.2006 2006-07 2007-08 2008-09 Coal Stock 3277 6875 6894 6875 Cost of Secondary Fuel Oil 448 501 502 501 O & M expenses 405 843 877 913 Spares 1507 2793 2960 3138 Receivables 9473 17800 19275 18997 Total Working Capital 15109 28812 30508 30423 Rate of Interest 10.25% 10.25% 10.25% 10.25% Interest on Working Capital 1549 2953 3127 3118
5. In addition, the petitioner has claimed energy charges @ 89.54 paise/kWh during the period 15.8.2006 to 31.3.2006 and @ 89.48 paise/kWh from 1.4.2006 onwards. The energy charges claimed are subject to adjustment in fuel price.
6. The reply to the petition was filed by respondents No 1,2, 3,4 and 7. The other respondents have not filed their reply. The petitioner has published notices in accordance with the procedure specified by the Commission. However, no objections or suggestions have been received in response to these notices.
CAPITAL COST
7. Clause 17 of the 2004 regulations relating to the capital cost provide as under:
17. Capital Cost: Subject to prudence check by the Commission, the actual expenditure incurred on completion of the project shall form the basis for determination of final tariff. The final tariff shall be determined based on the admitted capital expenditure actually incurred up to the date of commercial operation of the generating station and shall include capitalised initial spares subject to following ceiling norms as a percentage of the original project cost as on the cut off date:
(i) Coal-based/lignite-fired generating stations - 2.5%
(ii) Gas Turbine/Combined Cycle generating stations - 4.0% Provided that where the power purchase agreement entered into between the generating company and the beneficiaries provides a ceiling of actual expenditure, the capital expenditure shall not exceed such ceiling for determination of tariff;
[Provided further that any person intending to establish, operate and maintain a generating station may make an application before the Commission for ' in principle' acceptance of the project capital cost and financing plan before taking up a project through a petition in accordance with the procedure specified in the Central Electricity Regulatory Commission (Procedure for making application for determination of tariff, publication of the application and other related matters) Regulations, 2004, as applicable from time to time. The petition shall contain information regarding salient features of the project including capacity, location, site specific features, fuel, beneficiaries, break up of capital cost estimates, financial package, schedule of commissioning, reference price level, estimated completion cost including foreign exchange component, if any, consent of beneficiary licensees to whom the electricity is proposed to be sold etc. Provided further that where the Commission has given 'in principle' acceptance to the estimates of project capital cost and financing plan, the same shall be the guiding factor for applying prudence check on the actual capital expenditure:
Provided further that in case of the existing generating stations, the capital cost admitted by the Commission prior to 1.4.2004 shall form the basis for determination of tariff.
Note Scrutiny of the project cost estimates by the Commission shall be limited to the reasonableness of the capital cost, financing plan, interest during construction, use of efficient technology, and such other matters for determination of tariff.
8. The petitioner has considered a capital cost of Rs. 279258 lakh as on 1.4.2006. The unit-wise break-up of the capital cost based on the audited accounts as given in Form 5 of the petition are as follows:
Capital Expenditure Expenditure upto the date of commercial operation of Unit I, (15.8.2005) 150695 Additional capital expenditure on Unit I from 15.8.2005 to 31.3.2006 11152 Expenditure upto the date of commercial operation of Unit II as on 1.4.2006 117410 Total 279258
9. The above project cost is inclusive of IDC and FC of Rs. 26629 lakh. As such, the capital cost, excluding IDC and FC (hard cost) as on the date of commercial operation of the generating station is Rs. 252629 lakh. The petitioner has also furnished a list of deferred works amounting to Rs. 21342 lakh.
10. The capital cost as per TEC of the Central Electricity Authority vide its letter dated 1.10.1999 was Rs. 338477 lakh including IDC and FC of Rs 57418 lakh (at the exchange rate of 1US$ = Rs 42.50) at the price level of 3rd quarter of 1998.
11. It was noticed that the capital expenditure of Rs.279258 lakh claimed by the petitioner included expenditure on account of the liabilities incurred, but not actually discharged. By order dated 12.12.2006, the petitioner was, inter alia, directed to furnish the following information, namely:
(a) details of expenditure incurred up to 15.8.2005 (date of commercial operation of Unit I) and 1.4.2006 (date of commercial operation of Unit II) and capitalised; and
(b) liabilities included in the capital cost on accrual basis, that is, liabilities for which provision was made in the capital cost.
12. The petitioner in its affidavit dated 15.1.2007 has raised the issue of meaning and interpretation of the terms "actual expenditure incurred" and "actually incurred" and whether these are to be construed so as to restrict to the actual cash out flow in terms of provisions of Regulation 17 of the 2004 regulations. The petitioner has submitted that the "actual expenditure incurred" cannot be restricted to actual cash out flow, that is, actual amounts paid for meeting the capital expenditure. It has been argued that the liabilities incurred or obligation suffered form part of the actual expenditure incurred and accordingly, the details furnished in this regard in the petition, which are inclusive of the liabilities incurred, need to be considered for determination of tariff. To support its contention the petitioner has relied upon the statutory provisions of the Companies Act, Law Dictionaries and the observations made by the Hon'ble Supreme Court in certain judgements. According to the petitioner, notwithstanding that some payments may not have been made till the date of commercial operation of the generating station, there is a firm liability to make payments under the terms of the contract and accordingly these should be taken into account as a part of the capital cost as on the date of commercial operation, even though the liabilities incurred are to be discharged on a future date in a deferred manner. Therefore, the petitioner has urged that the term "expenditure incurred" is necessarily to be equated with liability incurred or obligation assumed.
13. The petitioner has relied upon Section 209 of the Companies Act, subsection (3) of which mandates that the books of accounts are to be kept on accrual basis. Thus, it is the contention of the petitioner that since Section 209 makes it obligatory to maintain books of accounts on accrual or mercantile basis, according to which the liabilities incurred are to be treated similarly with cash out flow on account of capital works, for the purpose of tariff also, the liabilities incurred need to be considered as part of the capital expenditure.
14. The petitioner has referred to the Black's Law Dictionary wherein term "incurred" is defined as:
to suffer or to bring on oneself (a liability of expense)' (page 771) The term 'actual' in the said dictionary is termed as 'existence in fact', 'real' (page 35)
15. The petitioner has also referred to the meaning of the term given in P. Ramanatha Aiyar's Law Lexicon which defines the term "incurred" as to become subject to or liable for by an act or operation of law. The word 'incur' means brought on.'
16. The petitioner has also relied upon the Stroud's judicial dictionary, wherein the term 'incurred' has been explained as under:
The phrase 'having incurred expenses' meant at least that the local authority had paid those expenses, or become liable to pay them, as distinguished from estimated expenses.' (West Ham v. Grant 58, L.J., Ch.121) 'Where an arbitrator or justices had to apportion 'expenses incurred' by a local authority, the inquiry was limited to the apportionment, and did not embrace the reasonableness or the actual payment of expenses" (Cook v. Ipswich L.R. 6 Q.B. 451)'
17. The petitioner has further placed reliance on the judgement in Madras Industrial Investment Corporation Ltd., v. CIT , the relevant part of which is extracted as under:
7. Thus "expenditure" is not necessarily confined to the money which has been actually paid out. It covers a liability which has accrued or which has been incurred although it may have to be discharged at a future date. However, a contingent liability which may have to be discharged in future cannot be considered as expenditure.
...
10. Therefore, although expenditure primarily denotes the idea of spending or paying out, it may, in given circumstances, also cover an amount of loss which has not gone out of the assessee's pocket but which is all the same, an amount which the assessee has had to give up. It also covers a liability which the assessee has incurred in praesenti although it is payable in futuro. A contingent liability that may arise in future is, however, not "expenditure". It would also cover not just a one-time payment but a liability spread out over a number of years.
18. The petitioner has referred to the following observation of the Hon'ble Supreme Court in Indira Nehru Gandhi v. Raj Narain 1975 Supp SCC 1 The word "incur" according to the dictionary meaning means to become liable to. The word "incur" means to undertake the liability even if the actual payment may not be made immediately. The undertaking of the responsibility for the expenditure concerned may be either by the candidate or his election agent. Again, a candidate is. also to be deemed responsible for the expenditure if he has authorised a particular expenditure to be made by someone else on his behalf.
19. The petitioner has also relied upon the judgement of Hon'ble Supreme Court in CIT Gujarat v. Tejaji Farasram Kharawala Ltd. wherein the Hon'ble Supreme Court held as under:
In the context in which the expression 'incurred' occurs in Section 4 (3) (vi) of the Income Tax Act, 1922, it undoubtedly means 'incurred or to be incurred'. To qualify for exemption the allowance must be granted to meet expenses incurred or to be incurred wholly and necessarily in the performance of the duties of an office or employment of profit.
20. In regard to Section 209 (3) of the Companies Act, it is sufficient for us to say that the provision applies only for the maintenance of books of accounts and cannot ipso facto be made applicable to fixation of tariff under the 2004 regulations. Therefore, we do not find any force in the petitioner's argument that determination of tariff should be on the same basis as employed for preparation of accounts. In our view the two aspects are altogether different.
21. We now consider it appropriate to examine the applicability of ratio of the judgements of the Hon'ble Supreme Court relied upon by the petitioner. As laid down by the Hon'ble Supreme Court in a recent judgement in Bombay Dyeing and Manufacturing Company Ltd.v. Bombay Environmental Action Group , as under:
312. ...An order of this Court, it is well known, must be construed having regard to the text and context in which the same was passed. For the said purpose, the orders of this Court were required to be read in their entirety. A judgment, it is well settled, cannot be read as a statute. Construction of a judgment, it is well settled, should be made in the light of the factual matrix involved therein. What is more important is to see the issues involved therein and the context wherein the observations were made. Any observation made in a judgment, it is trite, should not be read in isolation and out of context.
22. In another case reported as Islamic Academy Of Education v. State of Karnataka , the Hon'ble Supreme Court held that The Court cannot read some sentences from here and there to find out the intent and purport of the decision by not only considering what has been said therein but the text and context in which it was said. For the said purpose the Court may also consider the constitutional or relevant statutory provisions vis a vis its earlier decisions on which reliance has been placed.
23. In S. Gopal Reddy v. State of AP (1996) 4 SCC 532, the Hon'ble Supreme Court held that:
It is a well-known rule of interpretation of statutes that the text and the context of the entire Act must be looked into while interpreting any of the expressions used in a statute. The courts must look to the object which the statute seeks to achieve while interpreting any of the provisions of the Act. A purposive approach for interpreting the Act is necessary.
24. It is also pertinent to refer to the observations of the Hon'ble Supreme Court in CIT v. Sun Engineering Works (P) Ltd., which read as under:
39...Such an interpretation would be reading that judgment totally out of context in which the questions arose for decision in that case. It is neither desirable nor permissible to pick out a word or a sentence from the judgment of this Court, divorced from the context of the question under consideration and treat it to be the complete 'law' declared by this Court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before this Court. A decision of this Court takes its colour from the questions involved in the case in which it is rendered and while applying the decision to a later case, the courts must carefully try to ascertain the true principle laid down by the decision of this Court and not to pick out words or sentences from the judgment, divorced from the context of the questions under consideration by this Court, to support their reasonings. In Madhav Rao Scindia v. Union of India this Court cautioned:
It is not proper to regard a word, a clause or a sentence occurring in a judgment of the Supreme Court, divorced from its context, as containing a full exposition of the law on a question when the question did not even fall to be answered in that judgment.
25. Further, in Kalyan Chandra Sarkar v. Rajesh Ranjan , the Hon'ble Supreme Court reiterated the principle that while considering the ratio laid down in one case, the court will have to bear in mind that every judgment must be read as applicable to the particular facts proved or assumed to be true since the generality of expressions which may be found therein are not intended to be expositions of the whole of the law, but are governed and qualified by the particular facts of the case in which such expressions are to be found. It was held that a case is only an authority for what it actually decides, and not what logically follows from it. The Hon'ble Supreme Court decided that
17. Circumstantial flexibility, one additional or different fact may make a word of difference between conclusions in two cases. Disposal of cases by blindly placing reliance on a decision is not proper.
26. Further, in High Court of Judicature of Rajasthan v. P.P. Singh , the Hon'ble Supreme Court decided that:
Interpretation of a statute depends upon the text and context thereof. A statute should be interpreted having regard to the purpose and object for which the same was made.
27. From the above judgements of the Hon'ble Supreme Court it follows that a judgment is to be seen in the setting of the facts of a particular case. Reliance cannot be placed on decisions without discussing as to how the factual situation fits in with the fact situation of the decision on which reliance is placed. The observations of the Courts cannot be read out of their context, but must be read in the context in which they appear to have been stated, as the judgments are not to be construed as statutes. As noted by the Hon'ble Supreme Court, it is in the process of interpretation of words, phrases and provisions of a statute, the Courts embark into lengthy discussions but the discussion is meant to explain and not to define, since it is said that the judges interpret statutes, they do not interpret judgments, they interpret words of statutes; but their words are not to be interpreted as statutes.
28. In the light of the above settled law, the petitioner's reliance on the judgements of the Hon'ble Supreme Court in matters involving taxation and election disputes is not well-founded. The phrases "actual expenditure incurred" or "actually incurred" are to be interpreted in the context in which they are used in the 2004 regulations and not in the context of the terms used in taxation and election laws.
29. The 2004 regulations all along emphasize that the tariff is to be determined based on "actuals". Regulation 20 of 2004 regulations which relates to debt-equity ratio in respect of the thermal power generating stations owned by the petitioner, and reproduced below, throws sufficient light on the intention of the Commission.
20. Debt-Equity Ratio. (1) In case of the existing generating stations, debt-equity ratio considered by the Commission for the period ending 31.3.2004 shall be considered for determination of tariff with effect from 1.4.2004:
Provided that in cases where the tariff for the period ending 31.3.2004 has not been determined by the Commission, debt-equity ratio shall be as may be decided by the Commission:
Provided further that in case of the existing generating stations where additional capitalisation has been completed on or after 1.4.2004 and admitted by the Commission under Regulation 18, equity in the additional capitalization to be considered shall be,-
(a) 30% of the additional capital expenditure admitted by the Commission; or
(b) equity approved by the competent authority in the financial package, for additional capitalization; or
(c) actual equity employed, whichever is the least:
Provided further that in case of additional capital expenditure admitted under the second proviso, the Commission may consider equity of more than 30% if the generating company is able to satisfy the Commission that deployment of such equity of more than 30% was in the interest of general public.
(2) In case of the generating stations for which investment approval was accorded prior to 1.4.2004 and which are likely to be declared under commercial operation during the period 1.4.2004 to 31.3.2009, debt and equity in the ratio of 70:30 shall be considered:
Provided that where equity actually employed to finance the project is less than 30%, the actual debt and equity shall be considered for determination of tariff:
Provided further that the Commission may in appropriate cases consider equity higher than 30% for determination of tariff, where the generating company is able to establish to the satisfaction of the Commission that deployment of equity higher than 30% was in the interest of general public.
(3) In case of the generating stations for which investment approval is accorded on or after 1.4.2004, debt and equity in the ratio of 70:30 shall be considered for determination of tariff:
Provided that where equity actually employed is more than 30%, equity in excess of 30% shall be treated as notional loan: Provided further that where deployment of equity is less than 30%, the actual debt and equity shall be considered for determination of tariff.
(4) The debt and equity amount arrived at in accordance with above clause (1), (2) or (3), as the case may be, shall be used for calculation of interest on loan, return on equity, advance against depreciation and foreign exchange rate variation."
30. From the various clauses of Regulation 20, it would be seen that emphasis is that when equity deployed is less than the normative equity of 30%, equity actually employed is to be the basis for determination of tariff. In case the liabilities which are unpaid and are to be settled at a later date or time are included in the capital cost, as claimed by the petitioner, these will inflate the amount of equity, dehors the Regulation 20, since it will not be equity actually employed. Therefore, inclusion of deferred liabilities in the capital cost would be in violation of Regulation 20 of the 2004 regulations. In fact, Regulation 18 which deals with the additional capitalization specifically provides that the deferred liabilities comprising the expenditure incurred after the date of commercial operation, are to be considered as part of additional capital expenditure. For facility of reference, regulation 18 of the 2004 regulations is reproduced below.:
18. Additional capitalisation: (1) The following capital expenditure within the original scope of work actually incurred after the date of commercial operation and up to the cut off date may be admitted by the Commission, subject to prudence check:
(i) Deferred liabilities;
(ii) Works deferred for execution;
(iii) Procurement of initial capital spares in the original scope of work, subject to ceiling specified in regulation 17;
(iv) Liabilities to meet award of arbitration or for compliance of the order or decree of a court; and
(v) On account of change in law.
Provided that original scope of work along with estimates of expenditure shall be submitted along with the application for provisional tariff.
Provided further that a list of the deferred liabilities and works deferred for execution shall be submitted along with the application for final tariff after the date of commercial operation of the generating station.
(2) Subject to the provisions of clause (3) of this regulation, the capital expenditure of the following nature actually incurred after the cut off date may be admitted by the Commission, subject to prudence check:
(i) Deferred liabilities relating to works/services within the original scope of work;
(ii) Liabilities to meet award of arbitration or for compliance of the order or decree of a court;
(iii) On account of change in law;
(iv) Any additional works/services which have become necessary for efficient and successful operation of the generating station, but not included in the original project cost; and
(v) Deferred works relating to ash pond or ash handling system in the original scope of work.
(3) Any expenditure on minor items/assets like normal tools and tackles, personal computers, furniture, air-conditioners, voltage stabilizers, refrigerators, fans, coolers, TV, washing machines, heat-convectors, carpets, mattresses etc. brought after the cut off date shall not be considered for additional capitalisation for determination of tariff with effect from 1.4.2004.
Note The list of items is illustrative and not exhaustive.
(4) Impact of additional capitalisation in tariff revision may be considered by the Commission twice in a tariff period, including revision of tariff after the cut off date.
Note 1 Any expenditure admitted on account of committed liabilities within the original scope of work and the expenditure deferred on techno-economic grounds but falling within the original scope of work shall be serviced in the normative debt-equity ratio specified in regulation 20.
Note 2 Any expenditure on replacement of old assets shall be considered after writing off the gross value of the original assets from the original project cost, except such items as are listed in clause (3) of this regulation.
Note 3 Any expenditure admitted by the Commission for determination of tariff on account of new works not in the original scope of work shall be serviced in the normative debt-equity ratio specified in regulation 20.
Note 4 Any expenditure admitted by the Commission for determination of tariff on renovation and modernization and life extension shall be serviced on normative debt-equity ratio specified in regulation 20 after writing off the original amount of the replaced assets from the original project cost.
31. We are also conscious of the fact that the basis for the entire scheme for determination of annual fixed charges specified in the 2004 regulations is "cost plus" approach. For this reason, the term "expenditure incurred" or "incurred" are qualified by "actual" or "actually" emphasizing "something real" or "real" expenditure as opposed to something constructive, or theoretical or speculative. In case the returns are allowed, without corresponding cash out flow, it will amount to unjust enrichment of the petitioner at the cost of the consumer who ultimately bears the burden of tariff. In the proceedings for determination of tariff for the period 2004-09, it has come to the notice of the Commission that in the past in several cases, the petitioner charged tariff after accounting for liabilities in the capital cost, for many years without incurring actual expenditure. We do not find recurrence of these cases. We may add that as and when the liabilities are settled by the petitioner, it becomes entitled to additional capitalization and consequently revision of tariff.
32. While the case law cited by the petitioner does not fit into present context the view taken by us may find support from the decision of the Hon'ble Supreme Court in Rajasthan Welfare Society v. State of Rajasthan . In this case the question for determination was whether or not the amount of gratuity payable to the employees of the aided educational institutions was to be taken into consideration for determining the amount of grant-
in-aid. The appellant, who was running an educational institution contended that the gratuity payable to an employee was also to be included as part of the approved expenditure for the purpose of computing the grant payable to the appellant. Observing that the relevant Rule uses the phrase "actual salary", the Hon'ble Supreme Court dismissed the appeal holding that gratuity cannot be brought within the definition of salary since it was not part of the "actual salary".
33. In view of the foregoing, we proceed to determine the tariff based on the capital expenditure actually incurred by the petitioner and after excluding the liabilities for which the payments were not made till the date of commercial operation of the generating station. Accordingly, the capital cost considered in our calculations is as under:
As on 15.8.2005 As on 1.4.2006 Capitalized Gross black claimed by the petitioner as per 150695.41 279257.77 Liabilities included in above on annual basis 13231.90 13573.73 Capital cost actually incurred 137463.51 265684.04
34. The above capital cost includes IDC and FC. It is seen that the petitioner has adopted FIFO method for repayment of loan. The Commission, in its previous orders has uniformly followed the average method of repayment of loan since FIFO method results in higher IDC in on-going projects under construction and higher AAD in case of the existing generating stations. Accordingly, for this generating station also, IDC has been worked out with average method of loan repayment. Applying this correction, the capital cost considered for the purpose of tariff computation is as under:
As on 15.8.2005 As on 1.4.2006 Capital Cost actually incurred after deduction of liabilities on annual basis 137463.51 265684.04 Reduction in IDC due to average method of repayment.
781.22 1010.28 Capital Cost actually incurred up to the date of commercial operation for the purpose of tariff 136682.29 264673.76 DEBT-EQUITY RATIO
35. Clause (2) of Regulation 20 of the 2004 regulations prior to its amendment in June 2006 as amended on 3.9.2004 inter alia provided that (2) In case of the generating stations for which investment approval was accorded prior to 1.4.2004 and which is likely to be declared under commercial operation during the period 1.4.2004 to 31.3.2009, debt-equity in the ratio of 70:30 shall be considered:
Provided that where deployment of equity is less than 30%, the actual equity deployed shall be considered for the purpose of determination of tariff.
Provided further that the Commission may in appropriate case consider equity higher than 30% for the purpose of determination of tariff, where the generating company is able to establish to the satisfaction of the Commission that deployment of equity more than 30% was in the interest of general public;
36. The petitioner has considered normative debt-equity ratio of 70:30 in line with the 2004 regulations. As such, the debt equity ratio of 70:30 has been considered for computation of tariff.
37. Accordingly, out of the capital cost amounting to Rs.264673.76 lakh arrived at in para 33 above, an amount of Rs.79402 lakh as on 1.4.2006 has been treated as normative equity. For the period up to 31.3.2006, normative equity of Rs.41005 lakh has been considered.
TARGET AVAILABILITY
38. Target availability of 80% has been considered for recovery of full fixed charges and computation of fuel element in the working capital.
RETURN ON EQUITY
39. As per clause (iii) of Regulation 21 of the 2004 regulations, return on equity shall be computed on the equity base determined in accordance with regulation 20 @ 14% per annum. Equity invested in foreign currency is to be allowed a return in the same currency and the payment on this account is to be made in Indian Rupees based on the exchange rate prevailing on the due date of billing. In accordance with these provisions, return on equity has been worked out as under:
Details of Return on equity 2005 -06 2006-07 2007-08 2008-09 Equity 41005 79402 Addition due to Additional Capitalisation 0 0 Addition due to FERV 0 0 Equity 41005 79402 79402 79402 Return on equity @ 14% 5741 11116 11116 11116 INTEREST ON LOAN
40. Clause (i) of regulation 21 of the 2004 regulations inter alia provides that,-
(a) Interest on loan capital shall be computed loan-wise on the loans arrived at in the manner indicated in regulation 20.
(b) The loan outstanding as on 1.4.2004 shall be worked out as the gross loan as per regulation 20 minus cumulative repayment as admitted by the Commission for the period up to 31.3.2004. The repayment for the period 2004-09 shall be worked out accordingly on normative basis.
(c) The generating company shall make every effort to swap the loan as long as it results in net benefit to the long-term transmission customers.
The costs associated with such swapping shall be borne by the long-term transmission customers.
(d) The changes to the loan terms and conditions shall be reflected from the date of such swapping and benefits passed on to the beneficiaries.
(e) In case of any dispute, any of the parties may approach the Commission with proper application. However, the beneficiaries shall not withhold payment as ordered by the Commission to the generating company during pendency of any dispute relating to swapping of loan.
(f) In case any moratorium period is availed of by the transmission licensee, depreciation provided for in the tariff during the years of moratorium shall be treated as repayment during those years and interest on loan capital shall be calculated accordingly.
(g) The Generating Company shall not make any profit on account of swapping of loan and interest on loan.
41. The interest on loan has been worked out as mentioned below:
(a) Gross normative loan corresponding to 70% of admissible capital cost works out to Rs.95677.60 lakh as on 15.8.2005 and Rs. 185271.63 lakh as on 1.4.2006.
(b) Since the tariff of the generating station is being fixed for the first time, net loan opening as on 15.8.2005 is same as gross loan, cumulative repayment of loan being nil.
(c) The petitioner has considered FIFO method of repayment in case of loans from Allahabad, Canara, Corporation, Indian, J&K, PNB, SBI-I, South Indian, SBBJ, Union, United, Federal, and SBP Banks. Though SBI-II loan initially was computed by FIFO method, but the petitioner subsequently submitted revised Form
- 8 of interest on loan against this loan on average basis. Since application of FIFO method may result into higher AAD in case of the existing generating stations and higher IDC in case of ongoing projects, calculations of actual repayment have been made on average basis, taking into consideration terms and conditions of the loan drawal as furnished by the petitioner in Form 8 and the information and clarifications subsequently furnished.
(d) The petitioner has considered rate of interest on monthly/half-
yearly rest. In our computation, rate of interest has been considered on annual rest basis.
(e) Actual repayment of actual loan based on above corrections has been used to calculate normative repayment of loan, worked out as per the formula given below:
Normative Repayment= Actual Repayment
----------------x Normative Loan Actual Loan
(f) The repayment has been calculated based on normative loan in accordance with the decision of the Appellate Tribunal.
(g) Weighted average rate of interest calculated on actual loan and actual repayment as considered above has been applied on normative loan for calculating interest on loan.
(h) Financial charges of 0.03% for bonds (surveillance fee) and 20.91% withholding tax for Euro Bond incurred towards loans have been allowed and taken into consideration for calculation for interest on loan.
(i) Some of the loans, namely SBI-I (9.6%) & SBI-II (7%) carry floating rate of interest. Interest rates prevailing on the date of commercial operation of the unit/generating station have been considered for interest computation for the period from the date of commercial operation onwards. However interest on loan would be subject to adjustment on the basis of actual rate of interest applicable for the period.
(j) Loan drawals up to the date of commercial operation of the generating station as furnished by the petitioner have been considered.
(k) Repayment considered in case of foreign loans (Euro Bond) is bullet repayment.
(l) The petitioner has calculated average net loan for interest using day product method so as to true up its claim. Since all other claims are not trued up the method employed by the petitioner has not been considered. Average net loan has been calculated as average of opening and closing as was being done for other tariff orders pertaining to the period 2004-09.
42. Weighted average rates of interest, as calculated, are appended in Annexure I to this order:
43. The computation of interest on loan by applying weighted average interest rate are appended herein below:
COMPUTATION OF INTEREST ON LOAN 2005 -06 2006-07 2007-08 2008-09 Gross Loan 95678 185272 Addition due to Additional Capitalisation 0 0 Addition due to FERV 0 0 Gross Normative Loan 95678 185272 185272 185272 Cumulative Repayment upto Previous Year 0 5243 19721 36585 Net Loan-Opening 95678 180029 165551 148687 Repayment during the year 5243 14478 16864 17129 Net Loan-Closing 90435 165551 148687 131558 Average Loan 93056 172790 157119 140122 Weighted Average Rate of Interest on Loan 7.5382% 7.5425% 7.5070% 7.4438% Interest 7015 13033 11795 10430 DEPRECIATION
44. Sub-clause (a) of clause (ii) of Regulation 21 of the 2004 regulations provides for computation of depreciation in the following manner:
(i) The value base for the purpose of depreciation shall be the historical cost of the asset.
(ii) Depreciation shall be calculated annually based on straight line method over the useful life of the asset and at the rates prescribed in Appendix II to these regulations. The residual value of the asset shall be considered as 10% and depreciation shall be allowed up to maximum of 90% of the historical capital cost of the asset. Land is not a depreciable asset and its cost shall be excluded from the capital cost while computing 90% of the historical cost of the asset. The historical capital cost of the asset shall include additional capitalisation on account of Foreign Exchange Rate Variation up to 31.3.2004 already allowed by the Central Government /Commission.
(iii) On repayment of entire loan, the remaining depreciable value shall be spread over the balance useful life of the asset.
(iv) Depreciation shall be chargeable from the first year of operation. In case of operation of the asset for part of the year, depreciation shall be charged on pro rata basis.
45. Weighted average rate of depreciation calculated by the petitioner is 3.68% as on 15.8.2005 and 3.64% as on 1.4.2006. Since asset-wise liability provision is not furnished, calculation of depreciation rates has been based on gross value of the asset as furnished by the petitioner at applicable rates as per Appendix-II to the 2004 regulations and applied on pro rata basis on the admissible capital cost. For the assets not listed in Appendix II, the rates considered are as applicable to similar assets listed therein as considered in other tariff orders of 2004-09 period.
46. The gross depreciable value of the generating station is 0.9 x Rs.264673.76 = Rs.238206 lakh. This being the first year of operation of the generating station, cumulative depreciation and AAD recovered in tariff up to commencement of the tariff period is Nil.
47. Accordingly, depreciation works out to Rs.3106 lakh for the period 15.8.2005 to 31.3.2006 and Rs.9560 lakh each year during 2006-09 as shown hereunder pro rata:
Details of Depreciation 2005-06 2006-07 2007-08 2008-09 Gross block 136682.29 264673.76 264673.76 264673.76 Depreciable Value 123014 238206 238206 238206 Balance Useful life of the asset
-
Remaining Depreciable Value 123014 232963 218486 201622 Depreciation 4950 9560 9560 9560 ADVANCE AGAINST DEPRECIATION
48. As per sub-clause (b) of clause (ii) of Regulation 56 of the 2004 regulations, in addition to allowable depreciation, the transmission licensee is entitled to Advance Against Depreciation, computed in the manner given hereunder:
AAD = Loan repayment amount as per regulation 56 (i) subject to a ceiling of 1/10th of loan amount as per regulation 54 minus depreciation as per schedule
49. It is provided that Advance Against Depreciation shall be permitted only if the cumulative repayment up to a particular year exceeds the cumulative depreciation up to that year. It is further provided that Advance Against Depreciation in a year shall be restricted to the extent of difference between cumulative repayment and cumulative depreciation up to that year.
50. The petitioner has claimed Advance Against Depreciation based on repayment of the loan as considered for working out interest on loan. As mentioned above, the petitioner has considered FIFO method of repayment in case of loans from Allahabad, Canara, Corporation, Indian, J&K, PNB, SBI-I, South Indian, SBBJ, Union, United, Federal, and SBP Banks, and on average basis for SBI-II loan For the reasons already stated, all calculations of actual repayment have been made on average basis, taking into consideration terms and conditions of the loan drawal as per form-8 as furnished by the petitioner and subsequent information and clarification called for and submitted by the petitioner.
For working out Advance Against Depreciation, 1/10th of the loan has been worked out with reference to notional gross loan, while repayment of loan during the year has been worked out as mentioned above.
51. Based on the above, the petitioner is entitlement towards Advance Against Depreciation during the tariff period is as under:
ADVANCE AGAINST DEPRECIATION 2005 -06 2006-07 2007-08 2008-09 1/10th of Gross Loan(s) 9568 18527 18527 18527 Repayment of the Loan 5243 14478 16864 17129 Minimum of the above 5243 14478 16864 17129 Depreciation during the year 3106 9560 9560 9560 (A) Difference 2137 4918 7304 7569 Cumulative Repayment of the Loan 5243 19721 36585 53714 Cumulative Depreciation 3106 14803 29280 46144 (B) Difference 2137 4918 7304 7569 Advance against Depreciation [Minimum of (A) and (B)] 2137 4918 7304 7569 Annualised AAD 3406 O&M EXPENSES
52. The 2004 regulations have prescribed the following O&M expense norms for 200/210 MW and 500 MW units-
Year 2004-05 2005-06 2006-07 2007-08 2008-09 O&M expenses 200/210 MW units for 10.40 10.82 11.25 11.70 12.17 O&M expenses for MW units 500 9.36 9.73 10.12 10.52 10.95
53. The petitioner has claimed O&M Expenses as detailed below:
Years 2005-06 (Unit 1 only) 2006-07 2007-08 2008-09 O&M Expenses 4865 10120 10520 10950
54. The petitioner has prayed for a specific deviation pertaining to water charges in O&M expenses. The petitioner has submitted that in the past years, the State Governments have been resorting to manifold increase in the rates of water charges/royalty payable, which is not normally based on common commercial principles. Therefore, according to the petitioner, this increase cannot be covered under the normal O&M expenses allowed in the tariff. The petitioner has, therefore, submitted that any increase in the rates of water charges / royalty etc. by more than 4% per annum over the rates prevailing on 31.3.2004 should be additionally payable by the respondent beneficiaries.
55. The normative O&M expenses were finalized by the Commission after going through the transparent process of hearing and consulting all concerned and were based on the data furnished by the concerned utilities for different components of O&M, including water charges. Further, an escalation of 4% per year is in-built in the normative O&M expenses specified by the Commission. There may be other heads in O&M expenses where actual expenses may be less than the normative expenses specified by the Commission. Therefore, we do not consider it to be justified to allow increase under one head, that is, water charges in isolation. As such, recovery of additional O&M expenses on account of any increase in the rates of water charges/royalty etc. during tariff period cannot be allowed. However, the petitioner is at liberty to approach the Commission in accordance with law for recovery of additional water charges with proper justification and details of actual expenses incurred and recovered under other heads, if State Governments resort to abnormal increase in the rates of water charges/royalty during the tariff period.
56. Based on above discussion, year-wise O&M expenses for the generating station work out as follows-
Years 2005-06 2006-07 2007-08 2008-09 O&M Expenses 4865 10120 10520 10950
57. The petitioner has further submitted that the wage revision of its employees is due with effect from 1.1.2007 and the escalation of 4% provided in the O&M expenses would not cover the enhanced employee cost with effect from 1.1.2007.
The petitioner has prayed for liberty to seek enhancement in O&M expenses with effect from 1.1.2007 based on actual payments whenever paid. We are not expressing any view, as this issue does not arise for consideration at this stage.
The petitioner may approach for a relief in this regard at an appropriate stage in accordance with law.
INTEREST ON WORKING CAPITAL
58. In accordance with clause (v) of Regulation 21 of the 2004 regulations, working capital in case of Coal based/Lignite-fired generating stations shall cover:
(i) Cost of coal or lignite for 11/2 months for pit-head generating stations and two months for non-pit-head generating stations, corresponding to the target availability;
(ii) Cost of secondary fuel oil for two months corresponding to the target availability;
(iii) Operation and Maintenance expenses for one month;
(iv) Maintenance spares @ 1% of the historical cost escalated @ 6% per annum from the date of commercial operation; and
(v) Receivables equivalent to two months of fixed and variable charges for sale of electricity calculated on the target availability.
59. Under the 2004 regulations, the rate of interest on working capital shall be on a normative basis and shall be equal to the short-term Prime Lending Rate of State Bank of India as on 1.4.2004 or on 1st April of the year in which the generating station or a unit thereof is declared under commercial operation, whichever is later. Interest on working capital shall be payable on normative basis notwithstanding that the generating company has not taken working capital loan from any outside agency.
60. Working capital has been calculated considering the following elements:
(a) Coal stock: The coal cost has been worked out for 1-1/2 months on the basis of operational parameters and weighted average price of coal.
(b) Oil Stock: The oil stock for 2 months as per the operational parameters and weighted average price of secondary fuel oil has been considered. Details of the fuel components in working capital is as under:
2005-06 2006-07 2007-08 2008-09 Cost of coal for 1.5 months 3277 6875 6894 6875 Cost of secondary fuel Oil for 2 months 426 499 501 499
(a) O&M Expenses: O&M expenses for working capital have been worked out for 1 month of O&M expenses approved in para 39 above are considered in tariff of the respective year:
(b) Spares: The petitioner has calculated the value of maintenance spares for the purpose of working capital considering the capital cost of Rs.279258 lakh. The amount claimed for maintenance spares for the purpose is given below:
(Rs. in lakh) Year 2005-06 2006-07 2007-08 2008-09 Amount 1507 2793 2960 3138 The spares requirement has been worked out based on the historical cost of Rs.264673.76 lakh as on 1.4.2006. Accordingly, 1% of this cost has been escalated at the rate of 6% per annum to arrive at permissible spares consumption for the relevant year. The value of spares considered in the computation of working capital is as under:
(Rs. in lakh) Year 2005-06 2006-07 2007-08 2008-09 Amount 1367 2627 2785 2952
(c) Receivables: The receivables have been worked out on the basis of two months of fixed and variable charges. The supporting calculations in respect of receivables are tabulated hereunder:
Computation of receivables component of Working Capital 2005 -06 2006-07 2007-08 2008-09 Variable Charges (Rs./kWh Ex-bus) 0.8914 0.8947 0.8947 0.8947 Variable Charges per year (Rs.in lakh) 28768 57998 58157 57998 Variable Charges -2 months (Rs in lakh) 4795 9666 9693 9666 Fixed Charges -2 months (Rs in lakh) 4583 8622 8889 8778 Receivables (Rs in lakh) 9378 18289 18582 18444
61. The average SBI PLR of 10.25% as on 1.4.2005 and 1.4.2006 has been considered as the rate of interest on working capital during the period 2005-06 to 2008-09.
62. The necessary details in support of calculation of interest on working capital are appended below:
Calculation of Interest on Working Capital (Rs. in lakh) 2005-2006 2006-07 2007-2008 2008-09 Coal Stock 3277 6875 6894 6875 Oil stock 426 499 501 499 O & M expenses 405 843 877 913 Spares 1367 2627 2785 2952 Receivables 9378 18289 18582 18444 Total Working Capital 14853 29134 29638 29684 Rate of Interest 10.25% 10.25% 10.25% 10.25% Interest on Working Capital 1522 2986 3038 3043 ANNUAL FIXED CHARGES
63. A statement showing summary of the capital cost and other related matters is annexed to this order. The annual fixed charges for the period 15.8.2005 to 31.3.2009 allowed in this order are summed up as below:
(Rs. in lakh) Particulars 2005-2006 2006-07 2007-08 2008-09 Interest on Loan 7015 13033 11795 10430 Interest on Working Capital 1522 2986 3038 3043 Depreciation 4950 9560 9560 9560 Advance Against Depreciation 3406 4918 7304 7569 Return on Equity 5741 11116 11116 11116 O & M Expenses 4865 10120 10520 10950 TOTAL 27500 51733 53333 52668
64. The annual fixed charges for the year 2005-06 shall be payable on pro rata basis from 15.8.2005 to 31.3.2006.
ENERGY/VARIABLE CHARGES
65. The petitioner has adopted the following operational norms for 500 MW units as per clause (vi) and (v) of Regulation 16 of the 2004 regulations:
Particulars 15.8.2005 to 10.2.2006 (During stabilisation period of Unit-I) After stabilisation period of Unit-I from 11.2.2006 and onwards Secondary Oil consumption 4.5 ml/kWh 2 ml/kWh Auxiliary Energy Consumption 8.0% 7.5% Heat Rate.
2550 Kcal/kWh 2450 K cal/ kWh
66. The petitioner has claimed rate of energy charges of 89.54 paise/kWh during stabilization period of Unit-I for the period 15.8.2005 to 10.2.2006 and 89.48 paise/kWh after stabilization period of Unit-I from 11.2.2006 and onwards based on the above operational parameters and the following weighted average Particulars 15.8.2005 to 31.3.2006 for unit-I including stabilisation period From 1.4.2006 onwards GCV of Oil (LDO+HFO) 9650 k Cal/L 9650 k Cal/L GCV of Coal 4027.67 k Cal/Kg 3562.33 k Cal/ Kg Weighted average price of Oil (As procured basis) (LDO+HFO) 19327.73 Rs./kL 21433.67 Rs./kL Price of coal (As procured basis)s 1209.96 Rs./MT 1150.24/Mt
67. HSD/LDO is used only during cold boiler start up. Hot start ups and flame stability during low load conditions are taken care of by HFO which is the main secondary fuel oil. Since HFO is the main secondary fuel oil, it should only be considered for the computation of working capital requirement and base rate of energy charge. Therefore, HFO has been allowed as secondary fuel oil for the purpose of base rate of energy charge.
68. Further, FPA clause in the 2004 regulations takes care of the cost of HSD/LDO used at the generating station on as consumed basis on month-tomonth basis. As such, the petitioner is not being denied reimbursement of HSD/LDO whenever used.
69. Based on the above, base rate of energy charge works out 89.14 paise/kWh for the period 15.8.2005 to 31.3.2006 and 89.47 paise/ kWh thereafter as per the following computations:
Computation of Energy Charges Description Unit 15.8.2005 to 10.2.2006 (During stabilization period of Unit-I) 11.2.2006 to 31.3.2006 1.4.2006 onwards Capacity MW 500 500 1000 Gross Station Heat Rate kCal/kWh 2550.00 2450.00 2450.00 Specific Fuel Oil Consumption Ml/kWh 4.50 2.00 2.00 Aux. Energy Consumption % 8.00 7.50 7.50 Weighted Average GCV of oil kCal/l 9650 9650 9650 Weighted Average GCV of Coal kCal/Kg 4027.67 4027.67 3562.33 Weighted Average Price of Oil Rs/KL 18382.00 18382.00 21376.88 Weighted Average Price of Coal Rs./MT 1209.96 1209.96 1150.24 Rate of Energy Charge from Sec. Fuel Oil Paise/kWh 8.27 3.68 4.28 Heat Contributed from SFO kCal/kWh 43.43 19.30 19.30 Heat Contributed from Coal kCal/kWh 2506.57 2430.70 2430.70 Specific Coal Consumption Kg/kWh 0.62 0.60 0.68 Rate of Energy Charge from Coal Paise/kWh 75.30 73.02 78.48 Rate of Energy Charge ex-bus per kWh Sent Paise/kWh 90.84 82.92 89.47
70. The base rate of energy charges shall however, be subject to fuel price adjustment as per the formula given below:
FPA = A + B Where, FPA - Fuel price Adjustment for a month in Paise/kWh Sent out A - Fuel price adjustment for Secondary Fuel oil in Paise/kWh sent out B - Fuel price adjustment for Coal in Paise/kWh sent out And, 10 x (SFCn) {(Pom) - (Pos)} A = { } (100 -ACn) 10 { B = ------- { {(SHRn) (Pcm/Kcm) - (Pcs/Kcs) } (100 -ACn) { { } { }
- (SFCn) {(komxPcm/Kcm) - (kosxPcs/Kcs)} } { } } } Where, SFCn - Normative Specific Fuel Oil consumption in l/kWh SHRn - Normative Gross Station Heat Rate in kCal/kWh ACn - Normative Auxiliary Consumption in percentage Pom - Weighted Average price of fuel oil on as consumed basis during the month in Rs./KL.
Kom - Weighted average GCV of fuel oils fired at boiler front for the month in Kcal/Litre Pos - Base value of price of fuel oils as taken for determination of base energy charge in tariff order in Rs. / KL.
Kos - Base value of gross calorific value of fuel oils as taken for determination of base energy charge in tariff order in Kcal/Litre Pcm - Weighted average price of coal procured and burnt during the month at the power station in Rs. / MT.
Kcm - Weighted average gross calorific value of coal fired at boiler front for the month in Kcal/Kg Pcs - Base value of price of coal as taken for determination of base energy charge in tariff order in Rs. /MT Kcs - Base value of gross calorific value of coal as taken for determination of base energy charge in tariff order in kCal/Kg
71. The petitioner has also sought approval for the reimbursement of expenditure incurred on publication of notices in the newspapers. Although the petitioner has confirmed publication of public notices and submitted copies of the notices vide its affidavit dated 13.10.2006, the expenditure incurred in this regards is not available on record. We direct that the petitioner shall claim reimbursement of the said expenditure directly from the respondents in one installment in the ratio applicable for sharing of fixed charges on production of evidence of incurring expenditure. The petitioner has also sought reimbursement of filing fee of Rs.25 lakh paid. A final view on reimbursement of filing fee is yet to be taken by the Commission. The view taken on consideration of the comments received shall apply in the present case as regards reimbursement of filing fee.
72. In addition to the charges approved above, the petitioner is entitled to recover other charges like incentive, claim for reimbursement of Income-tax, other taxes, cess levied by a statutory authority, in accordance with the 2004 regulations, as applicable.
73. The petitioner is already billing the respondents on provisional basis in accordance with the Commission's interim directions. The provisional billing of tariff shall be adjusted in the light of final tariff now approved by us.
74. This order disposes of Petition No.106/2006.