Appellate Tribunal For Electricity
Maharashtra Eastern Grid Power ... vs Maharashtra Electricity Regulatory ... on 28 November, 2022
Appeal No. 18 of 2019 &
Appeal No. 173 of 2022
APPELLATE TRIBUNAL FOR ELECTRICITY AT NEW DELHI
(APPELLATE JURISDICTION)
Appeal No. 18 of 2019 &
IA No. 2150 of 2019 &
Appeal No. 173 of 2022
Dated : 28.11.2022
Present: Hon'ble Mr. Justice R. K. Gauba, Officiating Chairperson
Hon'ble Mr. Sandesh Kumar Sharma, Technical Member
IN THE MATTER OF:
Maharashtra Eastern Grid Power
Transmission Company Limited,
Adani House, Nr. Mithakhali Circle,
Navrangpura, Ahmedabad - 380009 ... Appellent
VERSUS
Maharashtra Electricity Regulatory Commission,
Through its Secretary,
World Trade Centre, Centre No. 1,
13th Floor, Cuffe Parade,
Mumbai - 400 005. .... Respondent(s)
Counsel for the Appellant(s) : Mr. Sanjay Sen, Sr. Adv.
Mr. Hemant Singh
Mr. Biju Mattam
Ms. Ankita Bafna
Ms. Alchi Thapliyal
Mr. Harshit Singh
Mr. Chetan Garg
Mr. Lakshyajit Singh Bagdwal
Mr. Nishant Kumar
Ms. Ruth Elwin
Mr. Tushar Srivastava
Mr. Ambuj Dixit
Mr. Shariq Ahmed
Ms. Soumya Singh
Mr. Mridul Chakravarty
Page 1 of 44
Appeal No. 18 of 2019 &
Appeal No. 173 of 2022
Ms. Supriya Rastogi Agarwal
Ms. Shruti Awasthi
Mr. Anirban Mondal
Mr. Karan Govel
Mr. Ruthwik Panda
Counsel for the Respondent(s) : Mr. S. K. Rungta, Sr. Adv.
Mr. Buddy A. Ranganadhan
Ms. Pratiti Rungta
Mr. Raunak Jain
Ms. Stuti Krishna
Mr. Sumit Pargal for R-1
JUDGMENT
PER HON'BLE MR. SANDESH KUMAR SHARMA, TECHNICAL MEMBER
1. The captioned appeals being Appeal No. 18 of 2019 and Appeal No. 173 of 2022 have been filed by M/s Maharashtra Eastern Grid Power Transmission Company Ltd. (in short "the Appellant") challenging the orders passed by Maharashtra Electricity Regulatory Commission (in short "MERC" or "State Commission") in relation to the tariff of the Appellant Transmission Project (in short "EGTP" or "Transmission Project").
2. The first captioned Appeal No. 18 of 2019 challenges the order dated 12.09.2018 rendered by the State Commission in the Multi Year Tariff (in short "MYT") Petition No. 169 of 2017 read with order dated 18.12.2018 in Review Petition No. 303 of 2018 for carrying out the Truing Up for financial year (in short "FY") 2015-16 and FY 2016-17 and Provisional True Up for FY 2017-18 with revised Annual Revenue Requirement (in short "ARR") for FY 2018-19 and FY 2019-20 wherein the following components of tariff were disallowed:
Page 2 of 44Appeal No. 18 of 2019 & Appeal No. 173 of 2022
(a) Actual Operation and Maintenance claimed by the Appellant for FY 2015-16 and FY 2016-17;
(b) Actual Capital Cost and its consequential impact upon Return on Equity, Interest on long term loan and depreciation for FY 15-16 and FY 16-17;
(c) Various capital cost components on the basis of the wrongful report of the independent expert, namely Arcturus Business Solutions LLP (ABSL) as independent expert;
(d) Interest on Working Capital ("IoWC") due to reduction of the quantum of Working Capital claimed by the Appellant for FY 2015- 16, and consideration of IoWC for FY 2016-17 as efficiency gain;
(e) Delayed Payment Surcharge ("DPC") by considering it as non-tariff income;
(f) Contribution towards contingency reserve;
(g) Actual long-term interest on loan; and
(h) Carrying Cost due to disallowance of components mentioned in (a) to (f) above, and reduction of Availability Incentive.
(i) Claim of reimbursement of FERV cost beyond Commercial Operation Date ("COD");
(j) Erroneous calculation for working out interest on Long Term loan (for Set-3) for the FY 2015-16; and
(k) Arithmetic error while working out amount of maintenance spares as part of working capital requirement for the FY 2015-16.
3. The Appeal No. 173 of 2022 assails the order dated 30.03.2020 passed by MERC in MYT Petition No. 290 of 2019 for True up of FY 2017-18 and FY 2018-19 and Provisional True Up for FY 2019-20 and revised ATT for FY 2020-21 to FY 2024-25, wherein the State Commission disallowed the Page 3 of 44 Appeal No. 18 of 2019 & Appeal No. 173 of 2022 following components of tariff resulting in reduction in the ARR claimed by the Appellant:
(a) Actual Capital Cost.
(b) Actual interest rate of long-term loan; and
(c) Non-allowance of IoWC due to reduction in Working Capital claimed by the Appellant for FY 2017-18;
4. During the hearing, it has been brought to our attention that prior to filing of these Appeals, the Appellant has preferred Appeal No. 260 of 2016 challenging MERC Order dated 05.07.2016 in Case No. 50 of 2016 (Multi- Year Tariff for True-Up for FY 2013-14 and FY 2014-15, Provisional Truing- Up of FY 2015-16 and approval of ARR for FY 2016-17 to FY 2019-20). Most of the issues were settled vide judgment dated 24.07.2020 in the said Appeal as raised by the Appellant by way of the above two Appeals, accordingly only the following issues are pressed for consideration in the two captioned Appeals:
(a) Disallowance of actual Interest on long-term loan (FY 2015-16 & FY 2016-17)
(b) Consideration of IoWC for FY 2016-17 as efficiency gain.
(c) Disallowance of Interest on Working Capital due to lack of separate demarcation
5. The factual matrix of the captioned Appeals is noted hereafter.
6. The Appellant is a company incorporated under the provisions of the Companies Act, 1956, and is an Intra State Transmission Licensee in the State of Maharashtra for the development of 765 kV Transmission System i.e. Page 4 of 44 Appeal No. 18 of 2019 & Appeal No. 173 of 2022 the EGTP to evacuate power from thermal power projects in North-Eastern Maharashtra to central and western parts of the State.
7. On 14.09.2010, MERC vide order in Case No. 118 of 2009 granted the Transmission License to the Appellant to establish and operate the said 765 kV EGTP including the transmission lines, substation bays and equipment with different commissioning dates and set of equipment.
8. For the purpose of the EGTP, the Appellant on 17.08.2012, executed a Rupee Term Loan Agreement (in short "RTLA"), wherein, in terms of Clause 9.2.16(ii)(d) & (g), the Appellant was required to arrange additional capital to finance the disallowed capital cost from its own resource.
9. On 04.02.2011, MERC notified the MERC (Multi Year Tariff) Regulations, 2011 (hereinafter referred to as "MYT Regulations, 2011") for FY 2011-12 to FY 2015-16.
10. On 23.09.2013, the Appellant filed Case No. 128 of 2013 to submit the Business plan for the Transmission Project for FY 2014-15 to 2015-16 as per MERC MYT Regulations 2011 for the second control period commencing from FY 2013-14 to FY 2015-16 which was approved by MERC by its order dated15.01.2014.
11. On 05.03.2014, the Appellant filed Case No. 66 of 2014 for determination of ARR for the 2nd Control Period for Set 1 and Set 2a of the said Transmission Project.
12. Subsequently, on 08.08.2014, MERC passed its Order in Case No. 66 of 2014 and provisionally approved MYT for FY 2013-14 to FY 2015-16 with a Page 5 of 44 Appeal No. 18 of 2019 & Appeal No. 173 of 2022 rider that final approved cost for the EGTP would be determined subject to prudence check once the project is completed in entirety, since 'Set 3' was envisaged to be commissioned by 31.03.2015. MERC considered Rs. 5730.10 Cr. as the total project cost and appointed expert/institution for detailed scrutiny, physical and financial verification of the completed capital cost as and when submitted by the Appellant.
13. On 08.02.2015, MERC notified the MERC (Multi Year Tariff) Regulations, 2015 (hereinafter referred to as "MYT Regulations, 2015") for the 3rd Control Period from FY 2016-17 to FY 2019-20.
14. On 09.03.2016, the Appellant filed a Petition before MERC bearing Case No. 50 of 2016 for Truing Up of FY 2013-14 and FY 2014-15, Provisional Truing Up of FY 2015-16 and approval of ARR for the 3rd Multi Year Tariff Control Period FY 2016-17 to FY 2019-20. The Appellant inter-alia claimed COD as 31.03.2015, since Set 3 of the Project was charged on 29.03.2015, while also claiming capital cost of Rs. 5773.87 Crore as on COD of the project as against 5730.10 Crore, the cost considered by the State Commission.
15. The Appellant, thereafter, on 12.05.2016, signed the Inter Corporate Deposit (in short "ICD") Loan Agreement with Adani Transmission Ltd. (in short "ATL") at the initial rate of interest of 12.50%.
16. On 05.07.2016, MERC passed its final order in Case No. 50 of 2016 wherein it reduced the ARR claimed by the Appellant and disallowed following:
(a) CoD of 3rd Set of transmission line and commencement of revenue Page 6 of 44 Appeal No. 18 of 2019 & Appeal No. 173 of 2022 from 31.03.2015;
(b) FERV on material import and price variation
(c) Various capital cost components;
(d) Consideration of outstanding Delayed Payment Charges as non- tariff income;
(e) Actual O&M Cost;
(f) Interest on Long-Term Loan (reduced);
(g) Income from Interest & Profit from Sale of Investment considered as non-tariff income; and
(h) Holding Cost of Interest on Contingency Reserve
17. Being aggrieved, by the disallowances, the Appellant filed Appeal No. 260 of 2016 on 19.08.2016 assailing the order dated 05.07.2016 passed by MERC in Case No. 50 of 2016.
18. Thereafter, on 05.05.2017, Addendum to ICD was executed between the Appellant and ATL for Working Capital Loan for FY 2017-18.
19. On 25.10.2017, Arcturus Business Solution LLP (in short "ABS"), appointed as a consultant by the MERC to verify the capital cost of MEGPTCL, provided its report on the project cost of the Transmission Project.
20. The Appellant on 29.11.2017, filed its Mid Term Review ("MTR") Petition in accordance with the provisions of the MYT Regulations, 2011 before MERC being Case No. 169 of 2017 for:
(a) Truing Up of FY 2015-16 and FY 2016-17;
(b) Provisional Truing Up of FY 2017-18; and
(c) Approval of revised ARR for FY 2018-19 and FY 2019-20.Page 7 of 44
Appeal No. 18 of 2019 & Appeal No. 173 of 2022
21. On 07.12.2017, Working Capital Loan Agreement was executed between HDFC Bank Ltd. and the Appellant for grant of working capital loan of Rs. 100 Cr. to the Appellant for FY 2017-18.
22. On 07.06.2018, the Appellant filed review under Case No. 169 of 2016 for Truing-up of FY 2016-17, Provisional Truing-up of FY 2017-18, approval of revised ARR for FY 2018-19, in accordance with the provisions of MYT Regulations 2015.
23. On 30.12.2017, post filing of MTR Petition, ATL raised a claim against the Inter Corporate Deposit citing adverse regulatory development that rate of interest has to be considered as 13.25% for FY 2015-16, the Appellant accordingly revised its claim.
24. On 12.09.2018, MERC passed Order in Case No. 169 of 2017 against which the Appeal No. 18 of 2019 was filed, wherein under Para 2.2.50, capital cost of the Project was approved as Rs. 5340.19 Crores as against the claimed cost of Rs. 5773.87 Crores. MERC disallowed certain components of the tariff which resulted in reduction in ARR claimed by the Appellant on account of the following issues:
(a) Non-allowance of actual Operation and Maintenance claimed by the Appellant for FY 2015-16 and FY 2016-17;
(b) Disallowance of Capital Cost and its consequential impact upon Return on Equity, Interest on long term loan & Depreciation for FY 15-16 and FY 16-17;
(c) Wrongful disallowance of various capital cost components on the basis of the report of the independent expert, namely Arcturus Business Solutions LLP (ABSL) as Independent Expert;Page 8 of 44
Appeal No. 18 of 2019 & Appeal No. 173 of 2022
(d) Reduction of the quantum of Working Capital and resultant non- allowance of Interest on Working Capital (IoWC) claimed by the Appellant for FY 2015-16, and consideration of IoWC for FY 2016- 17 as efficiency gain;
(e) Consideration of Delayed Payment Surcharge (DPC) as non-tariff income;
(f) Disallowance of contribution towards contingency reserve;
(g) Disallowance of actual long-term interest on loan; and
(h) On account of the disallowance of components mentioned in (i) to
(vi) above, the same has further resulted in disallowance of Carrying Cost, and reduction of Availability Incentive.
25. On 22.10.2018, the Appellant filed a Review Petition being Case No. 303 of 2018 before MERC against the Order dated 12.09.2018 on the following issues:
(a) Non-consideration of claim of reimbursement of FERV cost beyond COD;
(b) Erroneous calculation for working out interest on Long Term Loan (For Set 3) for FY 2015-16; and
(c) Arithmetic error while working out amount of maintenance spares as part of working capital requirement for FY 2015-16.
26. On 18.12.2018, MERC passed the order in Review Petition i.e., Case No. 303 of 2018 and partly allowed the claim of the Appellant pertaining to non-consideration of claim of reimbursement of FERV cost beyond COD, while rejecting the rest.
27. On 03.06.2019, the Appellant filed the first captioned Appeal No. 18 of 2019 before this Tribunal challenging the order dated 12.09.2018 passed in Page 9 of 44 Appeal No. 18 of 2019 & Appeal No. 173 of 2022 Case No. 169 of 2017 and order dated 18.12.2018 passed in Case No. 303 of 2018. In the said appeal, an amendment to appeal was also filed, which was allowed on 07.08.2019.
28. Separately, on 30.10.2019, the Appellant filed MYT being Case No. 290 of 2019 for approval of True up for FY 2017-18 and FY 2018-19, Provisional True Up for FY 2019-20 and Approval of ARR for 4th Control Period from FY 2020-21 to FY 2024-25. the Appellant claimed Rs. 5843.30 Cr. as capital cost for FY 2017-18 and Rs. 5849.98 for FY 2018-19.
29. On 04.11.2019, the Appellant filed an Application in Appeal No. 18 of 2019 seeking permission to raise additional grounds with respect to the issue of disallowance of actual long term interest on loan and interest on working capital.
30. On 10.11.2019, MERC conveyed preliminary data gaps in the information provided by the Appellant in Case No. 290 of 2019.
31. On 22.11.2019, the Appellant submitted additional documents and information as per MERC's direction on 10.11.2019 as' Additional Data Gap Set-1' in Case No. 290 of 2019, thereafter, on 21.11.2019, Technical Validation Session (TVS) was held after submission on Additional Data Gap Set-1.
32. On 07.12.2019, the Appellant filed a revised MYT Petition being Case No. 290 of 2019 comprising information related to additional data gaps.
Page 10 of 44Appeal No. 18 of 2019 & Appeal No. 173 of 2022
33. On 30.03.2020 MERC passed its Order in Case No. 290 of 2019 whereby the following components of tariff were reduced resulting in reduction in ARR:
(a) Disallowance of Actual Capital Cost.
(b) Non-allowance of actual interest rate of long-term loan; and
(c) Reduction of the quantum of Working Capital and resultant non-
allowance of Interest on Working Capital (IoWC) claimed by the Appellant for FY 2017-18;
34. On 27.05.2020, the Appellant filed Appeal No. 173 of 2022 challenging Order dated 30.03.2020 passed in Case No. 290 of 2019.
35. On 24.07.2020, this Tribunal passed its Judgment in Appeal No. 260 of 2016, holding that:
(i) CoD of 3rd set of Transmission Assets shall be 31.03.2015 and the Appellant shall be entitled to tariff from the said date onwards (Regulation 2.1 (29) read with Regulation 12 & 13)
(ii) FERV was allowed on the material import as well as variation of prices of raw materials during the period of delay considering that the delay was not attributable to the Appellant
(iii) As regards, disallowance of various capital component costs, the following was held:
For Additional bays at Akola -II sub-station and additional towers for charging the Bays, it was held that the additional bays and additional towers are not only out of scope of work but also not in use and are spare assets. Therefore, it was held that the cost of these assets cannot be passed on to the consumers and hence the claims of the Appellant on account of additional bays and additional towers was rejected.Page 11 of 44
Appeal No. 18 of 2019 & Appeal No. 173 of 2022 Insofar as claim for damaged items, demurrage charges and idling charges is concerned, this Tribunal rejected these claims of the Appellant in the overall interest of consumers. As regards, Interest during Construction, it was held that MERC has already approved provisional IDC, which is required to be finalized considering the contentions raised by the Appellant, thereby, allowing the said claim.
(iv) In view of the findings of the judgment dated 29.05.2019 in Appeal No. 250 of 2016 (ATIL vs. MERC), it was held that DPC cannot be considered as NTI. Accordingly, this issue was decided in favour of the Appellant.
(v) As regards O&M Cost, in view of the fact that this Tribunal had considered similar contentions raised in Appeal No. 250 of 2016 and decided against in the Judgment dated 29.05.2019. Therefore, this issue was decided against the Appellant.
(vi) As regards, approval of lower interest on long term loan, this Tribunal did not find any reason to intervene. However, it was held that the issue can be taken up by the Appellant with MERC during next tariff proceedings for clarity on computation of interest and correction of error, if any.
(vii) Insofar as Income from interest & profit from sale of investment being considered as non-tariff income, this Tribunal remanded the said issue back to MERC to reconsider as per the appropriate regulations after seeking necessary details and justification from the Appellant.
(viii) As regards, holding cost of interest on contingency reserves is concerned, this Tribunal did not find any infirmity in the decision of MERC, however, it was clarified that holding cost shall be applicable only on the amount that was recovered from the Page 12 of 44 Appeal No. 18 of 2019 & Appeal No. 173 of 2022 consumers and not invested as contribution to contingency reserves.
36. On 03.06.2021, MERC passed a consequential order in Case No. 50 of 2016 in terms of the findings of this Tribunal's judgment dated 24.07.2020 in Appeal No. 260 of 2016.
37. Considering the above, let us examine the aforesaid issues appeal wise i.e. issues in Appeal No. 18 of 2019 first followed by issues in Appeal No. 173 of 2022.
38. In Appeal No. 18 of 2019, the Appellant is aggrieved by the findings of the State Commission as reproduced hereunder:
(A) Disallowance of actual interest on long-term loan for FY 2015-
16 in the Order dated 12.09.2018 in Case No. 169 of 2017:
"3.4.9. The Commission has perused the loan agreements of the RTL as well as that of the ICD from Adani Infra (India) Ltd. It is observed from the tenure of the ICD facility is 365 days and as stated by MEGPTCL, is a short-term arrangement to bridge the cash needs of MEGPTCL, which was reported as a unsecured short-term loan in the books of accounts for FY 2014-15. 3.4.10. In view of above, the said ICD loan component from Adani Infra (India) Ltd., not being a part of project loan, cannot be considered as part of the actual loan portfolio for the purpose of deriving the weighted average interest rate to be applied for the working out the long-term interest expenses for MEGPTCL. Thus, weighted average interest rate of actual loan portfolio is worked Page 13 of 44 Appeal No. 18 of 2019 & Appeal No. 173 of 2022 out after excluding the ICD loan quantum and interest rate. Accordingly, the same works out to 11.67% p.a., which is considered for the purpose of working out interest expenses for truing up of FY 2015-16.
3.4.11. Even though MEGPTCL has refinanced the existing term loan with new loan (ICD Adani Transmission Ltd.) during FY 2015- 16 and has considered the same in the loan portfolio during FY 2015-16, the impact of the same will not apply on the interest rate to be allowed for FY 2015-16 as the interest rate for FY 2015-16 is approved only considering the 'opening' loan portfolio in FY 2015- 16 as per the MYT Regulation, 2011. Therefore, the detail submission made by the Petitioner and the corresponding treatment of the Commission on refinancing has been dealt with in detail in the subsequent section for true-up of interest expense for FY 2016-17.
3.4.12. Thus, upon perusal of the Audited accounts for FY 2015- 16 and in accordance with the above-referred provision of the MYT Regulation, 2011, the Commission approves interest rate of 11.67% p.a. for the purpose of truing-up of FY 2015-16. 3.4.13. Upon subsequent queries raised by the Commission, Petitioner has submitted the copy of the Loan Agreements of all its borrowings as on date, such as Common Rupee Loan Agreement, ICD Loan Agreement, etc. 3.4.14. The table below shows the interest expense approved by the Commission for FY 2015-16.
...
3.4.15. The Commission approves the Interest on Long Term Loans of Rs. 366.92 Crore for FY 2015-16."Page 14 of 44
Appeal No. 18 of 2019 & Appeal No. 173 of 2022 (B) Disallowance of actual interest on long-term loan for FY 2016- 17 in the Order dated 12.09.2018 in Case No. 169 of 2017 "4.4.21. As per the provisions of the ICD Agreement and the relevant extract reproduced above, outlines that the regulatory risks arising out of the regulatory orders and judgment from Hon'ble APTEL, if any, would result into increase in rate of interest on such borrowings and will have to be borne by the borrower. In case, such risk and increase in interest costs are allowed as pass through, it means that regulatory risks are to be borne by the beneficiaries, viz. transmission system users and ultimately by consumers.
4.4.22. The Commission here would specifically like to highlight that, such clauses in the loan agreement appears to have been accepted by both the parties on a mutual consent, in anticipation that any loss in revenue owing to disallowance in Tariff start date for Set-3 or O&M expense should lead to commensurate compensation through additional interest expense which again is another component of ARR of the Licensee. The Commission does not find it to be appropriate on the part of a Licensee that owns and operates a regulated business, cost of which has implications on its beneficiaries (i.e. Transmission System Users) and the common consumer at large. Further, before signing such ICD Agreement, with such unusual conditions, the Petitioner has neither informed nor sought approval from the Commission, considering the implications of the matter. Further, from the entire submission, it does not appears that the Petitioner has applied any efforts for refinancing its loans through open market as other Transmission Licensees has done. Instead, it approached to its own group entity and entered into agreement having unfavourable Page 15 of 44 Appeal No. 18 of 2019 & Appeal No. 173 of 2022 conditions and without any intimation to the Commission. The Petitioner appears to be trying to recover all its inefficiencies from the consumers to cover up the increase in project cost and delay for recovery owing to delay in execution, under the guise of increased interest expenses claimed.
4.4.23. In view of above, the Commission cannot consider to allow the interest rate claims of Petitioner as per ATL ICD loan and to allow interest costs arising from the 'refinancing' exercise carried out by MEGPTCL. Thus, the interest rate claim by MEGPTCL is disallowed and for truing up for FY 2016-17, the Commission continues to approve the rate of interest at 11.67% p.a. as elaborated in the para. 4.4 of this MYT Order.
4.4.24. Further, from FY 2016-17 onwards, the Commission approves the same rate of Interest approved for FY 2015-16, as 11.67%. The table below shows the interest expense approved by the Commission for FY 2016-17."
(C) Consideration of Interest on Working Capital (IoWC) for FY 2016-17 as efficiency gain in the Order dated 12.09.2018 in Case No. 169 of 2017 "4.10.5. As regards IoWC, MEGPTCL has submitted that it has not availed any working capital loan. Hence, the entire IoWC allowed after truing up is treated as efficiency gain for the purpose of sharing of Gains/(Losses)."
39. The Appellant, being aggrieved on account of disallowance of actual interest on long-term loan, has submitted that:
Page 16 of 44Appeal No. 18 of 2019 & Appeal No. 173 of 2022
(a) MERC has ignored the fact that the conditions stipulated or envisaged under an Inter Corporate Deposit (ICD) Agreement are standard conditions which are incorporated in financial documents.
(b) There was an increase in the project cost in view of the delay, which was also recognized by MERC in its Orders dated 08.08.2014 and 05.07.2016 passed in Case Nos. 66 of 2014 and 50 of 2016, respectively. To minimize the effect of such delay, the Appellant had to resort to additional finance to cater such increased project cost, from the lenders on the basis of in-principal approval of increased project cost i.e. Rs. 5730 Crore granted MERC vide its Order dated 08.08.2014 passed in Case No. 66 of 2014.
(c) MERC provisionally disallowed certain components of capital cost in Order dated 05.07.2016 passed in Case No. 50 of 2016, which qualifies as default on the part of the Appellant in accordance with the provisions of Clause 9.2.16 (ii) (d) of the Common RTLA dated 17.08.2012.
(d) The Appellant completed the Project within the in-principally approved project cost, as approved by MERC vide its Order dated 08.08.2014 passed in Case No. 66 of 2014. However, based on adverse regulatory Order of MERC dated 05.07.2016 passed in Case No. 50 of 2016, the Appellant defaulted in terms of Clause 9.2.16 (ii) (g) of the RTLA, wherein the Appellant had to arrange additional capital finance to fund the disallowed capital cost from its own resource.
(e) Refinancing was not the choice of the Appellant but the outcome of adverse condition/ uncertainty in terms of the Order of MERC and such uncertainty increased the risk profile of the Appellant which resulted in increase of the interest rates of loan. In view of the said fact, there was only one choice available to the Appellant to Page 17 of 44 Appeal No. 18 of 2019 & Appeal No. 173 of 2022 refinance the part of loan from its own resources or to finance the same through Inter Corporate Deposit (ICD) which is similar to a lending by group entities.
(f) The refinancing obtained by such ICD was agreed at the rate of 12.5% as per the terms of the financing, which was lower in comparison to the existing RTL portfolio of the Appellant which was between 12.5% to 13.5%. Thereafter, the passage of regulatory Order dated 05.07.2016 in Case No. 50 of 2016 disallowed the capital cost, thereby resulting in uncertainty and adversity, and therefore, the rate of interest of ICD was reset to 13.25% from 2017 as per pre-agreed terms of the loan. In addition to this, it is also significant to highlight that the previous loan portfolio consisted of loan at the rate of 13.50% obtained from SBI, which was refinanced and owing to the said fact, is it totally incorrect on the part of the MERC to conclude that the Appellant refinanced the earlier loan portfolio to increase the rate of interest.
(g) None of the provisions under the Electricity Act, 2003 impose any requirement/ stipulation upon a licensee to inform the Commission or to seek its approval before entering into a financial arrangement towards obtaining a loan. Hence, the observations of the Respondent Commission regarding the Petitioner not seeking any regulatory approval, is incorrect and misconceived. It is stated that under no circumstances the conditions incorporated under the ICD Agreement can be treated as unusual conditions as the same are standard conditions incorporated in financial documents.
(h) The Appellant explored possibility of refinancing through various other lenders. However, alternate lenders were not willing to make available for replacement of loan at better rates than refinanced Page 18 of 44 Appeal No. 18 of 2019 & Appeal No. 173 of 2022 rate of 13.25% in view of high-risk profile of the project and in view of adverse regulatory developments.
(i) SBI Caps by its letter dated 04.02.2016 indicated that rate of refinancing debt will be around 13.5% to 14%. Further, as per the PFC rate schedule dated 07.11.2013, the rate of interest for finance to Private Sector Borrowings to Transmission Sector entities for three years was 13.50%. Additionally, HDFC Bank had advanced Rs 100 Cr by its Sanction Letter dated 07.10.2017 for which Rate of Interest applicable was 13.25%.
(j) There is no restriction upon the licensee under the regulatory framework to obtain long-term finance from its group entity as fall back. In the present case, the Appellant obtained financial assistance from its group entity namely, ATL, at competitive interest rates. However, owing to adverse regulatory developments, as substantiated hereinabove, the Applicant/ Appellant was subjected to comply with the specific conditions of the ICD Agreement due to change of circumstances not under Applicant/ Appellant's control.
40. From the above, the issue which emerges out is whether the actual interest on long-term loan should include the ICD loan component in the actual loan portfolio of the Appellant under the relevant legal provisions and the provisions contained under various agreements signed and approved by MERC.
41. From the submissions made before us and as also seen from the Impugned Order, MERC allowed interest on Loan as 11.67% as against 11.95% as claimed by the Appellant for FY 2015-16 and 11.67% allowed as against claimed interest rate of 12.53% for FY 2016-17.
Page 19 of 44Appeal No. 18 of 2019 & Appeal No. 173 of 2022
42. From the extracted order passed as quoted in the preceding paragraphs, MERC has disallowed the actual interest claimed by the Appellant stating that the ICD loan component from ATL is not part of the project loan and therefore, cannot be considered as part of actual loan portfolio for the purpose of deriving the weighted average rate of interest, and also the Appellant has neither informed nor sought approval from MERC considering the implications of the matter before signing the ICD Agreement with such unusual conditions.
43. Additionally, MERC also observed that the Appellant has not made any efforts for refinancing its loan through open market, instead, it has approached its own group entity and entered into agreement having unfavourable conditions.
44. On the contrary, it has been placed before us by the Appellant that it has worked out the interest on long-term loan for 2015-16, based on the principles laid down under Regulation 33.1 & 33.3 of MYT Regulations, 2011 and Regulation 29.1, 29.2 & 29.3 of MYT Regulations, 2015 for FY 2016-17, accordingly, the Appellant having availed ICD as per the relevant Regulations.
45. Also, the RTLA as amended on dated 17.08.2012 and the ICD agreement, it is the case of the Appellant that there are no unusual conditions in the ICD Agreement, the conditions in the ICD Agreement as being the impact of adverse regulatory orders are standard in nature as already submitted by the Appellant in the foregoing paragraphs as also similar terms were there as part of the RTLA also.
Page 20 of 44Appeal No. 18 of 2019 & Appeal No. 173 of 2022
46. After perusing the RTLA dated 17.08.2012, it is noted that Article 9.2.16
(ii) (g) provides a risk mitigation mechanism in case of adverse regulatory treatment regarding project cost, as extracted below:
"(ii) The Borrower shall have procured from Adani Enterprises Limited an undertaking in the form and manner acceptable to the Facility Agent that it shall:
...
(g) in the event, the MERC Approved Project Cost is lower than the Estimated Project Cost, and the debt component of the means of finance for the Project is reduced proportionately to such approved lower project cost, it shall meet any funding gap in the means of finance from its own resources."
47. Therefore, the RTLA executed with different lenders which are not the group entities of the Appellant provides for mitigation of risk to the lenders, in the light of adverse orders in relation to the project cost.
48. We, therefore, find no merit in MERC's contention that the Appellant executed the ICD Agreement with its group entity with a condition as to pass on all its regulatory risks to the beneficiaries.
49. Further, the MYT Regulations 2011 and 2015 which have been relied upon by the Appellant do not require a transmission licensee to get its loan agreements approved by MERC before availing a loan facility. The relevant provision under the MYT Regulations 2011 and MYT Regulations 2015 for the respective control periods, is quoted as under for the sake of clarity:
Page 21 of 44Appeal No. 18 of 2019 & Appeal No. 173 of 2022 MYT Regulations 2011 "33. Interest on loan capital 33.1 The loans arrived at in the manner indicated in Regulation 30 shall be considered as gross normative loan for calculation of interest on loan.
Provided that in case of retirement or replacement of assets, the loan capital approved as mentioned above, shall be reduced to the extent of 70% (or actual loan component based on documentary evidence, if it is higher than 70%) of the original cost of the retired or replaced assets.
33.3 The repayment for the year of the tariff period FY 2011-12 to FY 2015-16 shall be deemed to be equal to the depreciation allowed for that year."
MYT Regulations 2015 "29. Interest on loan--
29.1 The loans arrived at in the manner indicated in Regulation 26 on the assets put to use shall be considered as gross normative loan for calculation of interest on loan:
Provided that in case of retirement or replacement or de- capitalisation of assets, the loan capital approved as mentioned above, shall be reduced to the extent of outstanding loan component of the original cost of such assets based on documentary evidence.
29.2 The normative loan outstanding as on April 1, 2016, shall be worked out by deducting the cumulative repayment as admitted by the Commission up to March 31, 2016, from the gross normative loan.Page 22 of 44
Appeal No. 18 of 2019 & Appeal No. 173 of 2022 29.3 The repayment during each year of the Control Period from FY 2016-17 to FY 2019-20 shall be deemed to be equal to the depreciation allowed for that year.
29.4 Notwithstanding any moratorium period availed, the repayment of loan shall be considered from the first year of commercial operation of the Scheme and shall be equal to the annual depreciation allowed."
50. As seen from the above, there is no requirement for a transmission licensee to get its loan agreements approved by MERC before availing a loan facility, as such, there was no occasion for the Appellant to approach MERC for seeking approval to the conditions prescribed in the ICD Agreement.
51. Accordingly, are not convinced with the contention of MERC that the Appellant ought to have informed MERC regarding the terms of the ICD Agreement.
52. The observation of MERC that the Appellant has not acted diligently in its efforts to refinance its loan from the open market, we observe that ICD interest rate was lesser than refinancing rate of interest in open market from the documents as placed before us.
53. The Appellant placed before us the letter dated 04.02.2016 received from SBI wherein the rate of refinancing of debt is claimed as 13.5% to 14%, also as per PFC rate schedule dated 07.11.2013, the rate of interest for finance to Private Sector Borrowings to Transmission Sector entities for 3 years was 13.50%. Additionally, advanced Rs. 100 Crore sanctioned by HDFC Bank vide its letter dated 07.10.2017 indicted the applicable rate of interest as 13.25%.
Page 23 of 44Appeal No. 18 of 2019 & Appeal No. 173 of 2022
54. As submitted by the Appellant, the interest rate for ICD as taken from ATL was initially fixed at 12.50% p.a., which was later increased to 13.25% p.a., in terms of ICD Agreement as there was delay in obtaining regulatory approvals which resulted into increased risk, the rate of interest would have remained at 12.50% p.a. if MERC would have approved the capital cost etc. Even otherwise, when the interest rate for the ICD was enhanced to 13.25%, the same was still less than 13.50% p.a. which was the earlier rate of interest for the loan availed from SBI.
55. As above, we cannot agree with the observation recorded by MERC that the Appellant made no efforts to refinance its loan from the open market as the arguments made and the documents placed before us, it is clear that the rate of interest offered in the ICD Agreement was lesser than the rate of interest being offered by other lenders.
56. The State Commission in support of its decision could not place before us the mandate as per law, it is a settled principle that once the State Commission have formulated its own Regulations under the Electricity Act, 2003, the State Commission is bound by the same. This has been settled by PTC India Ltd. v. Central Electricity Commission, (2010) 4 SCC 603 which inter alia holds as follows:
"59. A regulation under Section 178, as a part of regulatory framework, intervenes and even overrides the existing contracts between the regulated entities inasmuch as it casts a statutory obligation on the regulated entities to align their existing and future contracts with the said regulations."Page 24 of 44
Appeal No. 18 of 2019 & Appeal No. 173 of 2022
57. It is therefore clear that the Regulations framed by the State Commission under Section 181 of the Electricity Act, 2003, have over riding powers over the tariff orders issued under Sections 61, 62 and 86 of the Electricity Act, 2003 and must be adhered to by the State Commission in discharge of its statutory.
58. In the present case, the relevant Regulations provide for considering the actual weightage average rate of interest computed on the basis of actual loan portfolio at the time of trying-up and is applicable for all types of long term loans as the Regulations do not differentiate loans obtained from public sector or private sector or ICDs, also there is no restriction upon the licensee under the regulatory framework to obtain long term finance from group entity.
59. Therefore, the claim of the Appellant that the interest on the basis of the actual loan portfolio of the Appellant which also includes the loan availed through ICD Agreement at the rate of 13.25% p.a. in line with the relevant Regulations has merit and is allowed.
60. Regarding the issue on IoWC , MERC in the order dated 12.09.2018 has observed that the Appellant has not availed any working capital loan and therefore directed that IoWC (for FY 2016-17) allowed after truing up shall be treated as efficiency gain, the only reasons as provided by MERC for passing the said finding.
61. In this regard, the Appellant has submitted that:
(a) MERC considered the entire interest on working capital as efficiency gain since working capital requirement of the Appellant for the FY 2016-17 had been met through internal accruals and not through debt.Page 25 of 44
Appeal No. 18 of 2019 & Appeal No. 173 of 2022
(b) It is settled principle of law that internal funds also deserve interest in as much as the internal fund when employed as working capital loses the interest it could have earned by investment elsewhere. Further the licensee can never have any funds which has no cost. The internal accruals are not like some reserve which does not carry any cost. Internal accruals could have been inter-corporate deposits. In that case the same would also carry the cost of interest. Simply because internal accruals were used for FY 2016- 17, and there was no outflow of funds by way of interest on Working Capital, the IoWC cannot be denied.
(c) In arriving at whether there was a gain or loss, MERC was required to take the total picture into consideration which MERC erroneously failed to do. It cannot be said that simply because internal accruals were used and there was no outflow of funds by way of interest on Working Capital, and hence the entire interest on working capital was gain.
(d) As per Regulation 31.2 (b) of MYT Regulations, 2015, IoWC ought to be determined on normative basis and has to be equal to Base Rate on the date of filing of Tariff Petition plus 150 basis point.
62. The issue which has thus arises is whether the IoWC as after true-up for FY 2016-17 has to be treated as efficiency gain because the Appellant did not avail any working capital loan.
63. The Appellant has contended that the categorization of IoWC for FY 2016-17 as efficiency gains, since working capital requirements of the Appellant were met by internal accruals and not through debt is not correct as the internal funds deserve interest since internal funds when employed as Page 26 of 44 Appeal No. 18 of 2019 & Appeal No. 173 of 2022 working capital, loses the interest it could have earned by investment elsewhere.
64. This Tribunal in its Judgment dated 28.05.2009 in Appeal No. 115 of 2008 (titled Reliance Infrastructure Ltd. Vs. MERC & Ors), on a similar issue i.e. treatment of IoWC as efficiency gain, when working capital is funded through internal accruals has been has held as under:
"13. The Commission observed that in actual fact no amount has been paid towards interest. Therefore, the entire interest on working capital granted as pass through in tariff has been treated as efficiency gain. It is true that internal funds also deserve interest in as much as the internal fund when employed as working capital loses the interest it could have earned by investment elsewhere. Further the licensee can never have any funds which has no cost. The internal accruals are not like some reserve which does not carry any cost. Internal accruals could have been inter corporate deposits, as suggested on behalf of the appellant. In that case the same would also carry the cost of interest. When the Commission observed that the REL had actually not incurred any expenditure towards interest on working capital it should have also considered if the internal accruals had to bear some costs themselves. The Commission could have looked into the source of such internal accruals and the cost of generating such accruals. The cost of such accruals or funds could be less or more than the normative interest. In arriving at whether there was a gain or loss the Commission was required to take the total picture into consideration which the Commission has not done. It cannot be said that simply because internal accruals Page 27 of 44 Appeal No. 18 of 2019 & Appeal No. 173 of 2022 were used and there was no outflow of funds by way of interest on working capital and hence the entire interest on working capital was gain which could be shared as per Regulation No. 19. Accordingly, the claim of the appellant that it has wrongly been made to share the interest on working capital as per Regulation 19 has merit."
65. Further, vide judgment dated 28.05.2009 in Appeal No. 111 of 2008 titled Reliance Infrastructure Ltd. Vs. MERC & Ors, it is held by this Tribunal that :
"7. The Commission observed that in actual fact no amount has been paid towards interest. Therefore, the entire interest on working capital granted as pass through in tariff has been treated as efficiency gain. It is true that internal funds also deserve interest in as much as the internal fund when employed as working capital loses the interest it could have earned by investment elsewhere. Further the licensee can never have any funds which has no cost. The internal accruals are not like some reserve which does not carry any cost. Internal accruals could have been inter corporate deposits, as suggested on behalf of the appellant. In that case the same would also carry the cost of interest. When the Commission observed that the REL had actually not incurred any expenditure towards interest on working capital it should have also considered if the internal accruals had to bear some costs themselves. The Commission could have looked into the source of such internal accruals and the cost of generating such accruals. The cost of such accruals or funds could be less or more than the normative interest. In arriving at whether there was a gain or loss the Commission was required to Page 28 of 44 Appeal No. 18 of 2019 & Appeal No. 173 of 2022 take the total picture into consideration which the Commission has not done. It cannot be said that simply because internal accruals were used and there was no outflow of funds by way of interest on working capital and hence the entire interest on working capital was gain which could be shared as per Regulation No. 19. Accordingly, the claim of the appellant that it has wrongly been made to share the interest on working capital as per Regulation 19 has merit.
...
15. ...
b) The interest on working capital, for the year in question, shall not be treated as efficiency gain.
66. This Tribunal in its judgment dated 15.07.2009 in Appeal Nos. 137, 138 and 139 of 2009: Tata Power Company Ltd. Vs. MERC has also dealing the identical issue has decided that:
"20. In Appeal No. 111/08, in the matter of Reliance Infrastructure v/s MERC and Ors., this Tribunal has dealt the same issue of full admissibility of the normative interest on Working Capital when the Working Capital has been deployed from the internal accruals. Our decision is set out in the following paras of our judgment dated May 28, 2008 in Appeal No. 111 of 2008.
"7) The Commission observed that in actual fact no amount has been paid towards interest. Therefore, the entire interest on Working Capital granted as pass through in tariff has been treated as efficiency gain. It is true that internal funds also deserve interest in as much as the internal fund when employed as Working Capital loses Page 29 of 44 Appeal No. 18 of 2019 & Appeal No. 173 of 2022 the interest it could have earned by investment elsewhere.
Further the licensee can never have any funds which has no cost. The internal accruals are not like some reserve which does not carry any cost. Internal accruals could have been inter corporate deposits, as suggested on behalf of the appellant. In that case the same would also carry the cost of interest. When the Commission observed that the REL had actually not incurred any expenditure towards interest on Working Capital it should have also considered if the internal accruals had to bear some costs themselves. The Commission could have looked into the source of such internal accruals or funds could be less or more than the normative interest. In arriving at whether there was a gain or loss the Commission was required to take the total picture into consideration which the Commission has not done. It cannot be said that simply because internal accruals were used and there was no outflow of funds by way of interest on Working Capital and hence the entire interest on working capital was gain which could be shared as per Regulation No. 19. Accordingly, the claim of the appellant that it has wrongly been made to share the interest on Working Capital as per Regulation 19 has merit.
15. b): The interest on Working Capital, for the year in question, shall not be treated as efficiency gain."
21. In view of our earlier decision on the same issue we allow the appeal in this regard also."
Page 30 of 44Appeal No. 18 of 2019 & Appeal No. 173 of 2022
67. Reliance was also placed on the following judgments rendered by this Tribunal, whereby the decision taken in the aforesaid judgments are referred and settled.
i. Judgment dated 27.04.2011 in Appeal No. 191 of 2009:
Maharashtra State Power Generation Co. Ltd. Vs. MERC & Ors.:
ii. Judgment dated 13.09.2012 in Appeal Nos. 202 and 203 of 2010: Reliance Infrastructure Ltd. Vs. MERC & Ors.:
68. It is, thus, clear that this Tribunal has held that the Internal funds also deserve interest when employed as working capital as it loses the interest it could have earned by investment elsewhere, also it cannot be said that simply because internal accruals were used and there was no outflow of funds by way of interest on working capital and hence the entire interest on working capital was efficiency gain.
69. The State Commission argued these judgements are not applicable to the present case since these were passed before the notification of the MYT Regulations, 2015.
70. We do not find merit in this contention since the findings in the judgements are with respect to treatment of internal accruals at par with funds availed through debt, even the MYT Regulations, 2011 or the MYT Regulations, 2015 provide any mechanism for treatment of IoWC when working capital has been funded through internal accruals, therefore, the subsequent notification of the MYT Regulations, 2015 do not have any effect on the principles laid in the above judgments which squarely apply to the present case.
Page 31 of 44Appeal No. 18 of 2019 & Appeal No. 173 of 2022
71. It was also contended by MERC the Appellant has failed to furnish any documentary evidence in relation to IoWC, on the contrary, the Appellant has contended that MERC being a statutory body and being an auditor at the time of determination of tariff, has the power to require any document/ information to verify the veracity of a particular cost and through its arguments, MERC is trying to shift the complete onus of its failure in requiring and analyzing the necessary documents/ information in relation to the said IoWC upon the Appellant.
72. The State Commission in its order dated 12.09.2018 has not recorded any failure on the part of the Appellant in submitting any document as is being called for in relation to funding of working capital through internal accruals, we therefore, find the argument totally unreasonable, the State Commission cannot shift its failure in examining the documents and calling for additional documents, if required before taking the decision.
73. Our attention was invited to the judgment rendered in Mohinder Singh Gill & Anr. Vs. Chief Election Commissioner, New Delhi & Ors. (1978) 1 SCC 405, that when a statutory functionary makes an order based on certain grounds, its validity must be judged by the reasons so mentioned and cannot be supplemented by fresh reasons in the shape of affidavit or otherwise. Otherwise, an order bad in the beginning may, by the time it comes to court on account of a challenge, get validated by additional grounds later brought out, therefore, we agree with the contention of the Appellant that MERC is now trying to supplement its findings by way of pleadings in the present Appeal, the relevant extract of the judgment is reproduced as under:
"8. The second equally relevant matter is that when a statutory functionary makes an order based on certain grounds, its validity Page 32 of 44 Appeal No. 18 of 2019 & Appeal No. 173 of 2022 must be judged by the reasons so mentioned and cannot be supplemented by fresh reasons in the shape of affidavit or otherwise. Otherwise, an order bad in the beginning may, by the time it comes to court on account of a challenge, get validated by additional grounds later brought out. We may here draw attention to the observations of Bose, J. in Gordhandas Bhanji [Commr. of Police, Bombay v. Gordhandas Bhanji, AIR 1952 SC 16] :
"Public orders, publicly made, in exercise of a statutory authority cannot be construed in the light of explanations subsequently given by the officer making the order of what he meant, or of what was in his mind, or what he intended to do. Public orders made by public authorities are meant to have public effect and are intended to affect the actings and conduct of those to whom they are addressed and must be construed objectively with reference to the language used in the order itself."
Orders are not like old wine becoming better as they grow older. A CAVEAT"
74. We find no reason for us to depart from the position as set out in the aforesaid judgements rendered by this Tribunal on the issue in hand and thus decline to accept the contention of the State Commission observing that IoWC as after true-up for FY 2016-17 has to be treated as efficiency gain because the Appellant did not avail any working capital loan.
75. The Appellant also assailed the findings of MERC in Appeal No. 173 of 2022 which are extracted hereunder:
Interest on Long Term Loan Page 33 of 44 Appeal No. 18 of 2019 & Appeal No. 173 of 2022 "2.5.1. MEGPTCL submitted that it has worked out the Interest on loan in accordance with Provisions of Regulation 29 of the MYT Regulations, 2015 for True-Up of FY 2017- 18 and FY 2018-19. 2.5.2. Further, as per Regulations 29.5, the weighted average rate of interest computed on the basis of the actual loan portfolio during the concerned year shall be considered as the Rate of Interest. Accordingly, Rate of Interest applicable is 13.25% for FY 2017-18 and 13.25% for FY 2018-19, for which MEGPTCL has requested to allow the same in terms of applicable regulations. 2.5.3. Regarding disallowance of loan refinancing in the Order dated 12 September, 2018 in Case No. 169 of 2017, MEGPTCL referred to ruling of the Commission and submitted that the treatment is considered as unjust, erroneous and devoid of merit.
The Commission has failed to appreciate the fact that the conditions stipulated or envisaged under an Inter Corporate Deposit (ICD) Agreement are standard conditions which are incorporated in financial documents. It is submitted that there was an increase in project cost in view of delay which was also recognized by the Commission in its Order in Case No. 66 of 2014 & 50 of 2016. The Petitioner achieved additional finance to cater to such increased project cost from the lenders on the basis of in- principle approval of increased Project Cost i.e., Rs 5730 Cr by Commission vide order in Case No. 66 of 2014.
2.5.4. Further, the Commission had provisionally disallowed certain Capital Cost Items in Case No. 50 of 2016, which qualifies the default on part of MEGPTCL of the Clause 9.2.16 (ii)) (d) of Common Rupee Term Loan (RTL) dated 17 August, 2012 where in MEGPTCL was required to wrap up the Project within Project Cost as per Order of the Commission.
Page 34 of 44Appeal No. 18 of 2019 & Appeal No. 173 of 2022 2.5.5. MEGPTCL had wrapped up the Project within in-principle approved Project Cost by the Commission in Case No. 66 of 2014. However, based on the adverse Regulatory Order of the Commission in Case No. 50 of 2016, MEGPTCL defaulted in terms of Clause 9.2.16 (ii) (g) of the RTL agreement dated 17 August, 2012, where in Petitioner was required to arrange additional capital to finance the disallowed Capital Cost from its own Resource.
2.5.6. MEGPTCL submitted that, the refinance was not the choice, but the outcome of adverse condition / uncertainty in terms of the Order of the Commission and such uncertainty increased the risk profile of the Petitioner which led to increase in the Interest Rates of Loan.
2.5.7. Petitioner explored the possibility of refinancing through various other lenders. However, alternate lenders were not willing to make available for replacement of loan at better rates than refinanced rate of 13.25% in view of high-risk profile of the project and in view of adverse regulatory development. It is pertinent to note that SBI Caps by its letter dated 4 February, 2016 indicated that rate of refinancing debt will be around 13.5% to 14%. 2.5.8. Further, as per PFC rate schedule dated 7 November, 2013, the Rate of Interest for finance to Private Sector Borrowings to Transmission Sector entities for three years was 13.50%. Additionally, HDFC Bank had advanced Rs 100 Crore by its Sanction Letter dated 7 October, 2017 for which Rate of Interest applicable has been 13.25%. Petitioner has submitted the relevant supporting documents to it Petition.
2.5.9. Thus, in view of above, there was only choice available with MEGPTCL to Refinance the part of loan from own resources or to Page 35 of 44 Appeal No. 18 of 2019 & Appeal No. 173 of 2022 finance through Inter Corporate Depository (ICD), which is also a kind of lending by group entities.
2.5.10. The refinance by such ICD was agreed at the rate of 12.5% as per terms of financing which was even lower in comparison to the existing Rupee Term Loan Portfolio of the Petitioner which was between 12.5% to 13.5%. Thereafter, pursuant to regulatory order pronouncing disallowance of Capital Cost in July 2016 resulting in uncertainty and adversity, the rate of Interest of ICD was reset to 13.25% from in 2017 as per pre- agreed terms of loan.
2.5.11. Further, it is submitted that previous loan portfolio consisted of loan of 13.50% from SBI which also has been refinanced and therefore, it is totally incorrect for the Commission to conclude that, the Petitioner has refinanced only to increase interest rates.
2.5.12. Petitioner has also referred to the following observations made by the Commission in the Order dated 12 September, 2018 in Case No, 169 0f 2017:
......
2.5.13. With respect to the above observations of the Commission, it is submitted that none of the provisions under the Electricity Act, 2003 impose any requirement/ stipulation upon a licensee to inform the Commission or to seek its approval before entering into a financial arrangement towards obtaining a loan.
Hence, the observations of the Respondent Commission regarding the Petitioner not seeking any regulatory approval, is incorrect and misconceived. It is stated that under no circumstances the conditions incorporated under the ICD Page 36 of 44 Appeal No. 18 of 2019 & Appeal No. 173 of 2022 Agreement can be treated as unusual conditions as the same are standard conditions incorporated in financial documents. 2.5.14. It is further submitted that there is no restriction upon the licensee under the regulatory framework to obtain long-term finance from its group entity as fall back. In the present case, the Petitioner obtained financial assistance from its group entity namely, ATL, at competitive interest rates. However, owing to adverse regulatory developments, as substantiated hereinabove, the Petitioner was subjected to comply with the specific conditions of the ICD Agreement due to change of circumstances not under Petitioner's control and caused by regulatory orders for increase in rate of interest on which the Petitioner had no control. 2.5.15. In addition to the above, it is submitted that the Petitioner is only trying to recover its actual, bonafide and diligent costs incurred towards interest on long-term loan. It is not a case that the Petitioner has acted in a negligent manner delaying the completion of the Project.
2.5.16. Further, the Commission, while denying the cost incurred by the Petitioner towards interest on long-term loan, overlooked the fact that the adverse conditions incorporated or provided under the ICD Agreement in relation to increase in rate of interest, on account of adverse regulatory development, was conceived by the lender to cover the high risk perspective involved. Accordingly, the lenders stipulated and provided for increase in the rate of interest owing to adverse regulatory developments. Such covenants included in the ICD Agreement are based on commercial principles relating to prudent practices and are common and universally acceptable covenants in the financing documents/ agreements."
Page 37 of 44Appeal No. 18 of 2019 & Appeal No. 173 of 2022
76. The above issue is identical to the issue as decided in the foregoing paragraphs while adjudicating the first captioned Appeal being Appeal No. 2018 of 2019, therefore, this issue in Appeal No. 173 of 2022 is decided in favour of the Appellant.
77. The other finding of MERC which is challenged by the Appellant in Appeal No. 173 of 2022 is extracted hereunder:
Reduction of Working Capital "2.11.14. While examining the Working Capital Loan Agreement submitted by MEGPTCL, it was observed that it has met its total Working Capital Requirement of Rs. 245 Crore in FY 2017-18 through two sources viz. Rs. 100 Crore from HDFC Bank Limited and remaining Rs. 145 Crore classified from its existing Long-
Term ICD facility from ATL. The loan to the tune of Rs. 100 Crore from HDFC Bank Limited was availed vide an agreement dated 7 December, 2017 at a rate equivalent to HDFC MCLR plus spread where the IoWC for FY 2017-18 was booked as Rs. 3.27 Crore. The second loan of Rs. 145 Crore was availed by classifying existing Long-Term ICD facility from ATL (ATL ICD) to the extent of the required loan quantum of Rs. 145 Crore through an Addendum Agreement dated 5 May, 2017 at a rate of 13.25%. However, neither any proof of Interest Component was submitted as a documentary evidence against the loan availed from ATL ICD, nor it got reconciled with the Annual Audited Accounts. The note showing the 'finance cost for FY 2017-18' from the annual Audited accounts of FY 2017-18 and as shown in the annual Audited accounts of FY 2018-19 is as shown in the table below.
Page 38 of 44 Appeal No. 18 of 2019 & Appeal No. 173 of 2022 Finance Cost of FY 2017-18 (as Finance Cost of FY 2017-18 (as shown in Note 30 shown in Note 31 of audited accounts of FY of audited accounts of FY 2017-18) 2018-19) Finance Cost For year ended Finance Cost For year ended 31st March, 2018 31st March, 2018 (in Cr) (in Cr) Interest 371.21 Interest Expense 365.28 Expense - Long term 3.27 loan -Working 2.66 Capital Loan -Others Bank Charges 0.01 Bank Charges 0.01 & other & other Borrowing Borrowing Total 371.22 371.22
2.11.15 Upon perusal of the above referred notes 30 and 31 respectively in the annual accounts of FY 2017-18 and FY 2018- 19, it is observed that there is no break-up given for the interest expense viz., long term or working capital loan in the annual accounts of FY 2017-18. However, in the annual accounts for FY 2018-19, break up of interest expense for FY 2017-18 has been provided in terms of long term and working capital loan. Further, within the so provided break-up, only Rs. 3.27 Crore is shown against the interest expense against working capital loan in FY 2017-18. Thus, it is observed that though MEGPTCL has claimed an amount of Rs. 20.37 Crore as actual interest on working capital for FY 2017-18, the statutory auditor in the annual accounts have Page 39 of 44 Appeal No. 18 of 2019 & Appeal No. 173 of 2022 recognized only Rs 3.27 Crore as interest expense against working capital loan, which incidentally is the interest component of Rs. 100 Crore loan from HDFC Bank Limited. The balance interest expense of Rs. 17.10 Crore claimed by MEGPTCL as interest on working capital loan appears to have been recognized as part of Interest Expense - Long term loan. In view of this, while claim of Rs. 3.27 Crore reconciled to be interest expense towards working capital loan, the claim of Rs. 17.10 Crore fails to reconcile as part of the claim of interest expense towards working capital loan in FY 2017-18.
2.11.16 Thus, in view of the foregoing facts, the Commission has considered the Interest component of HDFC Bank Ltd. of Rs. 3.27 Crore only in FY 2017- 18 as actual IoWC for the purpose of Sharing of (Gains)/Losses computations."
78. The Appellant, however, submitted that:
(a) It has claimed the actual IoWC in Case No. 290 of 2019, as under:
(i) Rs. 20.37 Crore for FY 2017-18 for working capital requirement of Rs. 245 Cr.
(b) To substantiate its claim, the Appellant submitted the Working Capital Loan Agreements dated 05.05.2017 and 07.12.2017 executed with ATL and HDFC Bank respectively for the respective financial years. Further, the Appellant availed actual working capital loan and submitted its actual IoWC for these financial years duly certified by the Chartered Accountant (CA).
(c) The Appellant's entire requirement of working capital of Rs. 245 Crores in FY 2017-18 was catered to through two sources viz.Page 40 of 44
Appeal No. 18 of 2019 & Appeal No. 173 of 2022
(i) Rs. 100 Crore from HDFC Bank Limited at HDFC MCLR and
(ii) Rs. 145 Crore classified from its existing Long-Term ICD facility from ATL @13.25%.
(d) The Appellant vide 11.01.2020 specified to MERC that so far as Interest on Working Capital for FY 2017-18 is concerned, a total of Rs. 20.37 Cr. was paid out of which Rs. 3.26 Cr. was paid to HDFC Bank and Rs. 17.10 Cr. was paid to ATL.
79. MERC in its Counter Affidavit has made the following submissions:
(a) It has considered notes of the auditors and accordingly considered the interest component of HDFC Bank of Rs. 3.27 Cr. only in FY 2017-18 as actual IoWC for the purpose of sharing/losses computations.
(b) Rs. 17.10 Cr. is denied as the same is not reconciled as part of claim of interest expense towards Working Capital Loan in FY 2017-18.
(c) MERC in Order dated 03.06.2021 has observed that computation of revised IoWC is based on approach adopted by MERC in the past orders in line with MYT Regulations.
80. It was placed before us that on 07.01.2020, MERC wrote to the Appellant with the following queries:
(a) Actual Working Capital Loan to be provided by FY 2017-18 and FY 2018-19
(b) Actual Rate of Interest on Working Capital Page 41 of 44 Appeal No. 18 of 2019 & Appeal No. 173 of 2022
(c) The Appellant has booked the Working Capital borrowings of Rs.
399.32 Cr. in FY 2018-19 and NIL in FY 2017-18. the Appellant should justify the actual interest on working capital of Rs. 20.37 Cr. in FY 2017-18 duly reconciled with Annual Audited Accounts.
81. On 11.01.2020, the Appellant submitted the following response to the queries raised by MERC vide email dated 07.01.2020:
(a) For FY 2017-18:
(i) On 07.12.2017, the Appellant availed credit facility from HDFC Bank containing working capital facility amount of Rs. 100 Cr. The rate of interest for such facility is Rs. 13.25%. Interest component of FY 2017-18 is Rs. 3.64 Cr.
(ii) On 05.05.2017, an Addendum Agreement was entered into with ATL pursuant to the main load agreement dated 12.05.2016, where working capital amount of Rs. 145 Cr. with actual rate of interest on working capital as 13.25%.
(b) For FY 2018-19
(i) On 26.12.2018, Actual Working Capital Loan Agreement was entered into between HDFC Bank Ltd. and the Appellant with loan facility of Rs. 100 Cr.
(ii) On 01.10.2018, Addendum Agreement was executed with ATL for working capital loan of Rs. 200 Cr. with actual rate of interest on working capital as 13.25 % executed.
(c) Total Working Capital Interest as per the above documents for FY 2017-18 is as follows:
(i) HDFC Bank: Rs. 20.37 Cr. comprising Rs. 3.64 Cr. for 15.12.2017 to 15.03.2018 (date of repayment).Page 42 of 44
Appeal No. 18 of 2019 & Appeal No. 173 of 2022
(ii) ATL: Rs. 17.10 Cr. for 05.05.2017 to 26.03.2018 (date of repayment).
(iii) Bank Charges of Rs. 2.63 Cr.
(d) The HDFC Bank loan was repaid on 15.03.2018 and ATL loan was repaid on 26.03.2018.
82. As per the Working Capital Loan documents submitted by the Appellant along with the rate of interest, the computation of IoWC has been specified by the Appellant in its response dated 11.01.2020, it is settled principle of law by this Tribunal and referred in the preceding paragraphs that the loan managed from internal accruals cannot be considered efficiency gains and therefore, the IoWC has to be considered as per the Working Capital Loan Agreements. We allow the issue accordingly.
83. Additionally, the Appellant has submitted audited balance sheets with its Petition (ref: Annexure A-31 and 32) which authenticate Interest Expense as Rs. 371.21 Cr. for year ending on 31.03.2018. It is not reasonable that in the absence of separate demarcation of the interest component, the Appellant may be deprived of its rightful claim towards IoWC after complying with the Working Capital Loan documents, as already observed, MERC being a regulatory body is required to do a prudence check before rejecting any claim.
84. This Tribunal in Bharat Jhunjhunwala v. Uttar Pradesh Electricity Regulatory Commission, 2014 SCC OnLine APTEL 31 refrained on adjudicating the issue where it found that the regulatory commission has not performed the requisite prudence check and has directed the State Commission to perform the requisite function before rejecting a claim.
Page 43 of 44Appeal No. 18 of 2019 & Appeal No. 173 of 2022
85. The issue is thus, dealt accordingly in terms of the findings above.
ORDER For foregoing reasons as stated supra, we are of the considered view that the two captioned Appeals being Appeal No. 18 of 2019 and Appeal No. 173 of 2022 are allowed. The Impugned Orders being Order dated 12.09.2018 passed in Petition No 169 of 2017, Order dated 18.12.2018 in Review Petition No. 303/2018 and Order dated 30.03.2020 in Petition No. 290 of 2019 are set aside.
The State Commission (MERC) is directed to pass consequential order(s) in terms of above directions expeditiously, not later than three months from the date of this judgment.
PRONOUNCED IN THE OPEN COURT ON THIS 28TH DAY OF NOVEMBER, 2022.
(Sandesh Kumar Sharma) (Justice R. K. Gauba)
Technical Member Officiating Chairperson
REPORTABLE / NON-REPORTABLE
pr/mkj
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