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Page | 61 Appeal No104, 105 and 106 of 2012

(g) The reasoning of State Commission that the consumers for the regulated Mumbai business have contributed to the creation of the said assets and hence should continue to remain in the books of the regulated business is contrary to the judgment of the Supreme Court in the case of Tata Power Company vs. Maharashtra Electricity Regulatory State Commission: 2009 ELR (SC) 0246.

(g) The contentions of the Appellant in Appeal No. 17-18-19 of 2011 as recorded in the said Judgment, are as under:-

"8.1 With regard to Issue No. a) - it is contended that Tata Power had availed itself of a total loan of Rs.450 crore from IDFC and entered into Rupee Loan Agreement on 28.9.2006 which is Annexure A-5 to this appeal. The interest rate was linked to the credit rating by Credit Rating Information Services of India Ltd. (CRISIL) or International Credit Rating Agency (ICRA). At the time, when the loan was availed of, its credit rating was AAA and the rate of interest was 8.9% per annum but in September, 2008, the IDFC communicated by letter dtd.29.9.2008 that it was Page | 79 Appeal No104, 105 and 106 of 2012 resetting interest rate at 13 % for a period of one year from 29.9.2008. Unfortunately, the State Commission by ignoring the submission of the appellant allowed interest only at a rate of 1.45 % over 5-year G-sec rate (8.64%) although the appellant paid interest rate of 13%. This increase in the rate of interest was due to bad market conditions when the liquidity had dried up and the banks were lending even at the rate up to 18% per annum. In September, 2008, the appellant took loan of Rs.500 crore from the State Bank of India for six months at the rate of interest of 13.52% per annum. Interest rates of loans availed by the appellant for other business then the Mumbai licensed area was in the same range as applicable to the interest rates as applied to Tata Power-T under the IDFC loan. Thus, disallowance of actual interest rate was arbitrary."

(h) The findings of this Hon'ble Tribunal in Appeal No. 17-18-19 of 2011 on the IDFC loan issue are as under:-

"The State Commission made a special reference to the review of rating by ICRA according to which huge capacity expansions and the risks attached to the implementation of the projects significantly alters the Tata Power's business risk profile from that of the earlier licensee model. The CRISIL observes:-"This will result in gradual but inevitable shift in Tata Power's Business risk profile from the existing stable licensee business, to bid out generation projects supplying powers to new areas; the shift exposes the company likely higher counterparty risk, and to constraints in passing on cost increase to its buyers". It may be that the rating was for the entire Company and not on account Page | 80 Appeal No104, 105 and 106 of 2012 of a particular business of the Company, but the State Commission was not totally unjustified in holding that the credit rating at AAA was definitely on account of secured licensed business and not on account of other businesses which is supported by the details of the operative income earned by the Company during Financial Year 2008-09 between the Mumbai licensed area and the other business. The table at page 74 of the order of the State Commission reveals that around 82% of the total revenue earned by the TPC during the Financial Year 2008-09 was so earned from the Mumbai licensed area. The State Commission thus considered weighted average interest of 9.50% for truing up the interest expenses on IDFC loan of TPC for Financial Year 2008-09. But then the ICRA was not oblivious of the financial flexibility of all the businesses of the Company, although the increase in the interest rate was mainly linked to the risk associated with other projects of the Company. The appellant points out bad market conditions due to which interest rates were higher. True it is, the review of the ICRA and that of CRISIL singularly point out that there has been a shift in the business risk profile of the appellant. When the loan came up for reset in September, 2008 the IDFC revised the rate of interest due to the rating trigger clause. The rate of interest in respect of the short term loan does not appear to have any nexus in the present situation. Therefore, the anxiety of the State Commission to insulate the consumers of the Mumbai regulated business from the risks associated with the non-regulated businesses of the appellant is well understood, but the fact remains that the corporative entity is one and the same and even though credit rating fell down from AAA to AA it cannot be denied that the rate of interest Page | 81 Appeal No104, 105 and 106 of 2012 increased not solely due to decrease in the credit rating of the Company. In this connection reference to the decision dated 04.04.2007 in Appeal no.251 of 2006 may not be relevant because that case related to the payment of income tax. Though the IDFC communicated that it was resetting interest rate to 13% for two years due to fall of credit rating it reset the interest rate on 06.10.2009 to 10.40% per annum from 29.09.2009 to 28.09.2012.

Tata Power Company claimed weighted average of 10.95% although for one year it paid interest rate of 13% per annum and this interest rate cannot be solely related to the non-regulated business. The interest rate is based on the credibility of the corporate entity as a whole and not on the profitability of a particular business segment. It is submitted not unjustifiably that the benefit of lower interest rate on account of Tata Power's credibility as a 'Corporate entity' in the earlier years has been enjoyed by Mumbai Consumers. Hence, consumers are liable to bear the burden of higher interest rate due to a temporary change in the credit rating which also included the regulated business. We cannot fail to notice regulation 34.3.3 of the MERC Tariff Regulations mandates that AS 16 (Accounting Standards) shall apply for the determination of the interest on loan capital. This regulation stipulates that provisions of statements of Accounting Standard (AS16):Borrowing Costs of the Institute of Chartered Accountants of India shall apply to the extent not inconsistent with the provisions of the regulations, in determination of interest on loan capital Relevant AS-16 provides for borrowing costs of the enterprise and not of a specific carved out business component. Further, regulation 17 of the MERC Tariff Regulations, 2005 takes cognizance of market interest rate as Page | 82 Appeal No104, 105 and 106 of 2012 one of the uncontrollable factors. According to the explanation under the Tariff Regulation 17.6, the uncontrollable factors include economy-wide influences such as market interest rates. The interest rate is not covered by controllable factors indicated in the illustration under the regulation 17.6.2. However, it is accepted that the approval of the interest rate is subject to prudence check by the State Commission. Tariff Regulation 18 stipulates that the approved loss or gain due to uncontrollable factors shall be passed through as adjustment in tariff. So far as income tax is concerned the appellant has been showing separately its tax liabilities in respect of each of its business so that decision of this Tribunal in Appeal 251 of 2006 may not be relevant. There is a flaw on the logic of the State Commission to the effect that if benefits accrue to the Company on account of new business than the consumers must not get that benefit. The fact is that the State Commission approved the interest rate for the Mumbai regulated area after the reset for the second time i.e. from September 2009 onwards when the interest rate came down to 10.4% per annum. So long as the case of the utility is covered by the Regulations it cannot be denied interest as it claimed in Aggregate Revenue Requirement Petition. Whatever merit there might be in the State Commission's approach made from the pragmatic stand point the issue has to looked at purely from the legal point of view and when the regulation in particular supports the case of the appellant the issue rests there and it is of no avail to say that had the appellant not launched new projects the credit rating might have remained at AAA and consequently there would have not arisen increase in the rate of interest. If this practical consideration is taken to its logical extreme than Page | 83 Appeal No104, 105 and 106 of 2012 there will be ample scope of counter argument and the fact is that the appellant is a corporate entity and when there is no legal inhibition of launching new power project having implication definitely of risk factor the rate of interest that a financial institution charges and which cannot be questioned because of being an uncontrollable factor has to be accepted. Tata Power is an enterprise and is seen as a corporate entity based on corporate accounts. The financial institutions provide loans based on the balance sheet of a corporate entity. The credit rating reflects the confidence of the credit rating agencies with respect to all the businesses of a corporate entity. The interest rate was subsequently negotiated by Tata Power with IDFC and IDFC agreed to remove the rating trigger. Accordingly, IDFC reset the loan at 10.4% on 6.10.2009 on the basis of IDFC's PLR. As per information submitted by Tata Power in respect of IDBI loan of Rs.400 crores the interest rate for disbursement made at the end of March 2008 was 10.5% which was increased to 11.5% for disbursement made in August, 2008 and to 14% for disbursement made in October, 2008. The IDBI loan was based on BPLR. This indicates rising trend of interest rate around the time when the reset of interest rate was effected by IDFC. . The State Commission has not considered the fact from the review of ICRA (reproduced in the impugned order) that the cash infusion through the preferential offer of Rs.12 billion to Tata Sons Ltd. is positive from the credit perspective and that the rating continues to be supported by financial flexibility derived from being a part of the Tata group besides stable cash flows from its license business. It is difficult to imagine that the entire increase in interest rate from 8.9% to 13% was governed by the credit Page | 84 Appeal No104, 105 and 106 of 2012 rating of the appellant and not market conditions. As submitted by the learned counsel for the appellant the interest rates in domestic market were affected by the global melt down post- Lehman collapse in September, 2008."