CASE No. 105 of Coram Shri Azeez M. Khan, Member Shri Deepak Lad, Member. Maharashtra State Electricity Transmission Co. Ltd.

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1 Before the MAHARASHTRA ELECTRICITY REGULATORY COMMISSION World Trade Centre, Centre No.1, 13 th Floor, Cuffe Parade, Mumbai Tel. No / 65/ 69 Fax No Website: / CASE No. 105 of 2015 In the matter of Petition of Maharashtra State Electricity Transmission Co. Ltd. for review of Mid- Term Performance Review Order dated 26 June, 2015 in Case No. 207 of 2014 Coram Shri Azeez M. Khan, Member Shri Deepak Lad, Member Maharashtra State Electricity Transmission Co. Ltd....Petitioner Appearance For the Petitioner : Shri.Santosh Amberkar, CGM (F&A) For Consumer Representative : Dr. Ashok Pendse (TBIA) ORDER Dated 22 December, The Maharashtra State Electricity Transmission Co. Ltd. (MSETCL) has filed a Petition on 4 August, 2015 under Section 85 of the MERC (Conduct of Business) Regulations, 2004 for review of the Commission s Order dated 26 June, 2015 in Case No. 207 of 2014 in respect of its Mid-Term Performance Review (MTPR) for the Multi-Year Tariif (MYT) Second Control Period from to ( the Impugned Order ). 2. MSETCL s prayers are as under: - a) The Hon ble Commission may be pleased to admit the Review Petition; MERC Order Case No. 105 of 2015 Page 1 of 8

2 b) The Hon ble Commission may permit review of the Impugned Order dated 26 June, 2015 passed by the Hon ble Commission in Case No. 207 of 2014; c) The Hon ble Commission may be pleased to re-determine the ARR and true up for ; d) The Hon ble Commission may be pleased to re-determine the ARR for MYT Second Control Period from to i.e. True up for and Revised Estimates of ARR for and , e) The Hon ble Commission may please condone any inadvertent omissions / errors / short comings in the present Review Petition and may further permit the Review Petitioner lo add / modify / change / amend / alter the present Review Petition and to make further submissions as may be required during the proceedings; f) The Hon ble Commission may please provide the workable excel model used by the Hon ble Commission for approval of the Review Petition; At the hearing held on 18 November, 2015, MSETCL made a presentation setting out its contentions and arguments, and reiterating the submissions made in its Petition. 4. The aspects and grounds on which review of the Impugned Order has been sought, as submitted by MSETCL, are set out below, along with the Commission s analysis and rulings. MSETCL s claims for review have to be considered in terms of Regulation 85(a) of the MERC (Conduct of Business) Regulations, 2004, which specifies the limited ambit of review as follows: 85. (a) Any person aggrieved by a direction, decision or order of the Commission, from which (i) no appeal has been preferred or (ii) from which no appeal is allowed, may, upon the discovery of new and important matter or evidence which, after the exercise of due diligence, was not within his knowledge or could not be produced by him at the time when the direction, decision or order was passed or on account of some mistake or error apparent from the face of the record, or for any other sufficient reasons, may apply for a review of such order, within forty-five (45) days of the date of the direction, decision or order, as the case may be, to the Commission. Ground A: Incorrect computation of Interest on Working Capital for MSETCL s Submission 4.1 The Commission has considered one twelfth of the actual Operation and Maintenance (O&M) expenses approved for for computation of the working capital requirement for that year. However, the Commission has considered one twelfth of the normative O&M expenses approved for onwards while computing the working capital requirements for the respective years. Thus, the Commission has committed an error apparent from the face of the record. Accordingly, review is sought of the Interest on Working Capital (IoWC) computation for and, consequently, sharing of efficiency gains or losses on IoWC for that year. There has MERC Order Case No. 105 of 2015 Page 2 of 8

3 been no change in the formula for computing the working capital requirement in the MERC (Terms and Conditions of Tariff) Regulations, 2005 ( Tariff Regulations ) and the MERC (MYT) Regulations, 2011 ( MYT Regulations ). 4.2 MSETCL s computation of IoWC is as follows: Table 1: Interest on Working Capital for , as submitted by MSETCL (Rs. Crore) Particulars Computation of Working Capital One-twelfth of the amount of Operations and Maintenance Expenses One-twelfth of the sum of the book value of stores, materials and supplies One and a half months of the expected revenue from transmission charges at the prevailing Tariffs MYT Order MSETCL MTPR Petition Approved in Order in Case No. 207 of 2014 MSETCL's review Petition Total Working Capital Computation of working capital interest Rate of Interest (% p.a.) 14.75% 14.75% 14.75% 14.75% Interest on Working Capital Accordingly, based on the change in the IoWC computation for , MSETCL has submitted the following revised computation of sharing of efficiency gains/(losses) on IoWC for that year as follows: Table 2: Revised computation for sharing of efficiency gains/(losses) for Interest on Working Capital for in review Petition (Rs. Crore) Particulars Actual Entitlemen t as per Regulation /Order Interest on Working Capital Efficiency Gain/(Loss ) Efficiency Gain/(Los s) shared with TSUs Net Entitleme nt of MSETCL a b c = b-a d = c/3 e = b-d As approved in Order in Case No. 207 of MERC Order Case No. 105 of 2015 Page 3 of 8

4 Particulars Actual Entitlemen t as per Regulation /Order Interest on Working Capital Efficiency Gain/(Loss ) Efficiency Gain/(Los s) shared with TSUs Net Entitleme nt of MSETCL As submitted by MSETCL in review Petition Accordingly, the Commission may revise the IoWC for Commission s Analysis and Ruling 4.5 The Commission notes that the Tariff Regulations, 2005 were applicable for and the MYT Regulations, 2011 are applicable from onwards till the end of the Second Control Period, i.e The Tariff Regulations did not specify any norms for computation of the O&M expenses, and the Licensees were required to provide projections of O&M expenses for future years based on past performance. 4.7 The actual O&M expenses as per the audited accounts were considered for True-up. Accordingly, one twelfth of the actual O&M expenses on True-up of have been considered for the computation of IoWC. 4.8 The Commission had adopted a similar approach for approval of IoWC during the True-up for in its MYT Order in Case No. 39 of 2013, since was also governed by the Tariff Regulations and the actual O&M expenses as per the audited annual accounts have been considered for the computation of IoWC. This approach was not challenged by MSETCL in its Petition for review of the MYT Order in Case No. 79 of The MYT Regulations applicable from specify norms based on the number of bays and circuit kilometres (Ckt. Km.) of the Transmission Lines for the computation of O&M expenses, and these are used for the computation of IoWC. Accordingly, the normative O&M expenses were reassessed for based on the actual number of bays and length of Transmission Line capitalised during the year, and considered for computation of the normative IoWC for the as part of the True-up process In its Petition for True-up of in Case No. 207 of 2014, MSETCL itself had also considered the same approach as adopted by the Commission. However, it is now seeking to deviate from this methodology for computation of working capital in its present Petition The Commission has adopted different approaches for computing O&M expenses for deriving the working capital requirements for and in accordance with the difference in the Regulations applicable for the respective MERC Order Case No. 105 of 2015 Page 4 of 8

5 years. Therefore, the Commission finds no merit in MSETCL s argument and rules that it does not qualify for review. Accordingly, no change is proposed in the computation of IoWC on True-up for Ground B: Incorrect computation of Interest on long term loans for MSETCL s Submission 4.12 The Commission has computed the weighted average interest rate of the loan portfolio at the beginning of the year, considering the loan details submitted by MSETCL in Case 207 of 2014, as 10.38% for as against 10.68% submitted by MSETCL in its Petition in that Case. The Commission has considered an incorrect weighted average interest rate while computing the interest expenses for in the Impugned Order, and thus committed an error apparent on the face of the record justifying review of the approved interest expenses for MSETCL has submitted the following computation of interest expenses in the review Petition: Table 3: Computation of interest expenses for , as submitted in the review Petition (Rs. Crore) Particulars MYT Order MSETCL MTPR Petition Approved in Order in Case No. 207 of 2014 MSETCL's review Petition Opening Balance Additions Repayments Less: Reduction in loan due to retirement of assets Closing Balance Interest rate approved 11.15% 10.68% 10.38% 10.68% Interest Expenses Commission s Analysis and Ruling 4.14 The Tariff Regulations were applicable for computation of interest expenses during The relevant provisions of the Tariff Regulations pertaining to the calculation of interest expenses read as follows: The Transmission Licensee shall be allowed to recover the interest rate on loan capital for approved capital expenditure projects commenced on or after April 1, 2005, approved additions to fixed assets and approved purchases of fixed assets on or after such date based on the following terms and conditions: MERC Order Case No. 105 of 2015 Page 5 of 8

6 (a) The interest rate shall be as approved by the Commission in the investment plan; 4.15 In its Petition for True-up for , MSETCL had computed the weighted average rate of interest considering the interest rate for each loan at the beginning of the year, and computed the weighted average rate based on the loan-wise opening balance of the loan. The methodology adopted by MSETCL was in line with the provisions of the MYT Regulations which are applicable from onwards; however, they are not applicable for , to which the Tariff Regulations were applicable Considering the loan-wise details submitted by MSETCL, it was evident that the interest rates for some of the loans were floating during the year. Accordingly, the methodology adopted by the Commission for approval of the interest expenses on True-up for is as given below: o The average interest rate for individual loans was computed by dividing the actual interest paid during the year by the average of the opening and closing balances of the respective loans. The interest rate derived thereby reflects the actual rate levied by the respective lenders during the year. o The weighted average interest rate of the loan portfolio was computed considering the average interest rate of individual loans and the opening loan balance of the respective loans. The weighted average rate so derived was used for computation of interest expenses for Considering the fact that the Tariff Regulations did not stipulate any specific methodology for computation of interest rate for approval of interest expenses, the Commission, for the purpose of True-up, adopted an approach which is more reflective of the actual rate of interest paid by MSETCL on its loan portfolio rather than considering the weighted average rate of interest derived using the loan-wise rates of interest prevailing at the beginning of the year which would have changed during the course of the year. The effective rate incurred by MSETCL would also be impacted by elements like the time when the loan was drawn during the year, etc. Therefore, the Commission rules that this claim of MSETCL has no merit and does not qualify for review. Accordingly, no change is proposed in the computation of interest expenses on True-up for Ground C: Denial of carrying cost on deferred recovery recognized in Case No. 79 of 2014 MSETCL s Submission 4.18 In the Impugned Order, the Commission has not provided carrying cost on the deferred recovery as recognized in its Order in Case No. 79 of Hence, the Commission has committed an error apparent on the face of the record justifying review MSETCL has submitted the following computation of carrying cost on deferred recovery of Return on Equity (RoE) from to and Incentive on MERC Order Case No. 105 of 2015 Page 6 of 8

7 Transmission System Availability from to in its review Petition: Table 4: Computation of carrying cost for deferred recovery recognized in Case No. 79 of 2014, as submitted in review Petition (Rs. Crore) Particulars RoE& Incentive SBI PLR 11.87% 12.26% 14.40% 14.61% 14.58% 14.75% 14.75% Total Carrying Cost Computation Total Carrying Cost 6.23 Commission s Analysis and Ruling 4.20 MSETCL had filed a Petition in Case No. 79 of 2014 for review of the MYT Order in Case No. 39 of In its Order dated 24 June, 2014, considering MSETCL s submissions for revision of the equity portion of net capitalisation during , the Commission had approved the equity portion for that year as Rs Crore instead of the earlier quantum of Rs crore approved in the MYT Order in Case No. 39 of Pursuant to this, the Commission recomputed the RoE for to and the Incentive for Transmission System Availability for to at Rs Crore and Rs Crore, respectively, i.e. a total revised incremental Aggregate Revenue Requirement (ARR) of Rs crore In its review Petition in Case No. 79 of 2014, MSETCL had not sought any carrying cost on this revised incremental ARR, and the Commission had also not approved any carrying cost while approving recovery of the additional cost The Commission had directed MSETCL to approach it for consideration of the amounts approved in the review Order during the MTPR, as follows: 8.1. As per above analysis and observations, the Commission has approved additional amounts in the Truing up in , APR in and the MYT Second Control Period. As the InSTS Tariff has already been issued in Order dated 13 May, 2013 in Case No. 56 of 2013, MSETCL may MERC Order Case No. 105 of 2015 Page 7 of 8

8 approach the Commission for the additional amount established under this Order in the MYT Mid Term Performance Review In the MYT Order in Case No. 39 of 2013 dated 13 February, 2014, the Commission had also stated as follows: MSETCL submitted that on account of disallowance of capitalisation in past years, it could not recover the required revenue for those years. MSETCL requested the Commission to consider appropriate carrying cost on the impact of disallowed capitalisation of the past years and allow the same to be recovered The Commission opined that MSETCL hasn t been able to recover the revenue for the past years because MSETCL did not seek the Commission s In-principle approval before executing the scheme. Hence, the schemes were initially disallowed by the Commission and later, approval was granted based on submission of relevant documents by MSETCL. The delay in getting approval is on account of MSETCL s delayed submission. The Commission calculated impact of disallowed capitalisation on ARR as and when the capitalisation is approved and pass on the impact on ARR in the Tariff of subsequent years. Thus, the Commission hasn t allowed any carrying cost on the impact of disallowed capitalisation of previous years as the delay in recovery is attributed to MSETCL alone Therefore, the net impact of Rs crore without any carrying cost would be added to the cumulative revenue gap and recovered in the subsequent Tariff From the above, it is evident that the revised ARR on account of revised RoE and Incentive for to and to , respectively, pertained to the disallowed capitalisation of previous years and, therefore, no carrying cost was applicable on such incremental revised ARR. Hence, allowing carrying cost on the impact of disallowed capitalisation from onwards is not appropriate and against the principle outlined by the Commission in its Order in Case No. 39 of 2013 while approving this amount Accordingly, the Commission rules that this claim of MSETCL also has no merit and does not qualify for review. 5. MSETCL has also sought a copy of the workable excel model used by the Commission, presumably in respect of the original Order. That request will be dealt with separately under the provisions of the Commission s Conduct of Business Regulations. The Petition of Maharashtra State Electricity Transmission Co. Ltd. in Case No. 105 of 2015 stands disposed of accordingly. Sd/- (Deepak Lad) Member Sd/- (Azeez M. Khan) Member MERC Order Case No. 105 of 2015 Page 8 of 8