Case No.44 of Shri V. P. Raja, Chairman Shri Vijay L. Sonavane, Member Smt Chandra Iyengar, Member ORDER

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1 Before the MAHARASHTRA ELECTRICITY REGULATORY COMMISSION World Trade Centre, Centre No.1, 13th Floor, Cuffe Parade, Mumbai Website: Case No.44 of 2013 IN THE MATTER OF Maharashtra State Power Generation Company Limited s (MSPGCL s) Petition for determination of Capital Cost and Tariff of Khaperkheda Unit # 5 for FY Shri V. P. Raja, Chairman Shri Vijay L. Sonavane, Member Smt Chandra Iyengar, Member Date: 4 September, 2013 ORDER The Maharashtra State Power Generation Company Limited (MSPGCL or Mahagenco) submitted a Petition under Sections 61, 62 and 86 (1)(a)(b) of the Electricity Act, 2003 and Part E of MERC (Terms and Conditions of Tariff) Regulations, 2005 before the Maharashtra Electricity Regulatory Commission (MERC or the Commission) on 22 March, 2013 for determination of Capital Cost and Tariff of its Khaperkheda Thermal Power Station Unit # 5 for FY The Commission, in exercise of the powers vested in it under Section 61 and Section 62 of the Electricity Act, 2003 (EA 2003) and all other powers enabling it in this behalf, and after taking into consideration all the submissions made by MSPGCL, all the suggestions and objections of the public, responses of MSPGCL, issues raised during the Public Hearing, and all other relevant material, determines the Capital Cost and Tariff of Khaperkheda Unit # 5 for FY as under. MERC, Order in Case No 44 of 2013 Page 1

2 Table of Contents 1 BACKGROUND AND BRIEF HISTORY Background Admission of the current Petition and Public Hearing process Organisation of the Order OBJECTIONS RAISED, RESPONSE FROM MSPGCL AND COMMISSION S VIEW Capital Cost MSPGCL s reply Commission s view Tariff MSPGCL s reply Commission s view Merit Order Despatch MSPGCL s reply Commission s view Project Management MSPGCL s reply Commission s view APPROACH OF THIS ORDER CAPITAL COST OF KHAPERKHEDA UNIT # Capital Cost of Khaperkheda Unit # Background to Project Commissioning Comparison of capital cost Hard cost Land & Site Development Commission s Analysis BTG Package Commission s Analysis BoP Electrical and Mechanical Package MERC, Order in Case No 44 of 2013 Page 2

3 Commission s Analysis Civil Works Commission s Analysis Construction and Pre-Commissioning activities Commission s Analysis Overheads 61 Commission s Analysis Initial Spares Interest During Construction Commission s Analysis Liquidated Damages Commission s Analysis MEANS OF FINANCE Commission s Analysis Tariff of Khaperkheda Unit # 5 for FY Energy Charges Fuel Supply Agreement Commission s Analysis Calorific Value and Price of Fuel Commission s Analysis Operational Parameters Commission s Analysis Additional capitalisation Commission s Analysis Annual Fixed Charges Operation and Maintenance Expenses Commission s Analysis Depreciation Commission s Analysis Interest on Long Term Loan MERC, Order in Case No 44 of 2013 Page 3

4 Commission s Analysis Advance Against Depreciation Commission s Analysis Return on Equity Commission s Analysis Income Tax Commission s Analysis Interest on Working Capital Commission s Analysis Non Tariff Income Annual Fixed Charges MERC, Order in Case No 44 of 2013 Page 4

5 List of Tables Table 1.1: Newspaper Notice of Public Hearing Table 4.1: Comparison of Ordering Cost and Cost as on COD submitted by MSPGCL (Rs. Crore) Table 4.2: Award of BoP Package submitted by MSPGCL Table 4.3: Award of other Packages submitted by MSPGCL Table 4.4: Letters written to M/s BHEL and M/s BGR submitted by MSPGCL Table 4.5: Delay in milestone activities submitted by MSPGCL Table 4.6: Key milestones Table 4.7: Comparison of Capital Cost submitted by MSPGCL (Rs. Crore/MW) Table 4.8: Item wise comparison of Capital Cost submitted by MSPGCL (Rs. Crore) Table 4.9: Land & Site Development Cost as on COD approved by the Commission (Rs. Crore) Table 4.10: Comparison of Ex-works supply price of BTG submitted by MSPGCL. 49 Table 4.11: Comparison of price for Erection, Testing and Commissioning submitted by MSPGCL Table 4.12: Cost of BTG as on COD approved by the Commission (Rs. Crore) Table 4.13: Cost of BoP Electrical and Mechanical as on COD approved by the Commission Table 4.14: Details of Miscellaneous Civil Works submitted by MSPGCL Table 4.15: Cost of Civil Works as on COD approved by the Commission (Rs. Crore) Table 4.16: Cost of Construction and pre commissioning activities as on COD approved by the Commission (Rs. Crore) Table 4.17: Overheads as on COD approved by the Commission (Rs. Crore) Table 4.18: Initial Spares as on COD approved by the Commission Table 4.19: Hard Cost as on COD approved by the Commission (Rs. Crore) Table 4.20: Loan Drawdown Schedule submitted by MSPGCL (Rs. Crore) Table 4.21: Assumptions for IDC Computation submitted by MSPGCL Table 4.22: Project Cost including IDC approved by the Commission (Rs. Crore) Table 4.24: Capital Cost as on COD approved by the Commission (Rs. Crore) Table 4.26: Details of Internal Accruals submitted by MSPGCL (Rs. Crore) Table 4.27: Debt and Equity as on COD submitted by MSPGCL Table 4.28: Means of Finance considered by the Commission (Rs. Crore) Table 5.1: Imported Coal supply schedule submitted by MSPGCL Table 5.2: Study on usage of coal submitted by MSPGCL Table 5.3: Calorific Value and Price of Fuel submitted by MSPGCL Table 5.4: Landed Price and Calorific Value of Fuel considered by the Commission 80 MERC, Order in Case No 44 of 2013 Page 5

6 Table 5.5: Comparison of Bunkered Calorific Value and Weighted Average Calorific Value Table 5.6: Actual Realisation of coal during FY submitted by MSPGCL Table 5.7: Impact on performance parameters submitted by MSPGCL Table 5.8: Performance parameters approved by the Commission Table 5.9: Energy Charge approved by the Commission for FY Table 5.10: Details of Additional Capitalisation submitted by MSPGCL Table 5.11: Quantum of Spares after COD and upto cut-off date approved by the Commission (Rs. Crore) Table 5.12: Additional Capitalisation for FY approved by the Commission 93 Table 5.13: O&M expenses for FY submitted by MSPGCL Table 5.14: Computation of escalation rate for FY submitted by MSPGCL 95 Table 5.15: Basis for Escalation rates submitted by MSPGCL Table 5.16: WPI data submitted by MSPGCL Table 5.17: CPI data submitted by MSPGCL Table 5.18: WPI Inflation submitted by MSPGCL Table 5.19: CPI Inflation submitted by MSPGCL Table 5.20: Computation of escalation rate for FY submitted by MSPGCL 97 Table 5.21: O&M expenses approved by the Commission for FY (Rs. Crore) Table 5.22: Depreciation for FY approved by the Commission Table 5.23: Loan Drawal considered by the Commission for FY (Rs. Crore) Table 5.24: Loan repayment submitted by MSPGCL Table 5.25: Interest on Loan approved by the Commission (Rs. Crore) Table 5.26: Advance Against Depreciation approved by the Commission (Rs. Crore) Table 5.27: Return on Equity for FY approved by the Commission (Rs. Crore) Table 5.28: Income Tax approved by the Commission for FY (Rs. Crore) 106 Table 5.29: Interest on Working Capital approved by the Commission for FY (Rs. Crore) Table 5.30: AFC approved by the Commission for Khaperkheda Unit # 5 for FY (Rs. Crore) Table 5.31: Tariff approved by the Commission for FY MERC, Order in Case No 44 of 2013 Page 6

7 List of Figures Figure 1: Timeline for development of 500 MW Units by Central Utilities submitted by MSPGCL Figure 2: Timeline for development of 500 MW Units by State Sector Utilities submitted by MSPGCL MERC, Order in Case No 44 of 2013 Page 7

8 List of Abbreviations AAD Advance Against Depreciation ABT Availability Based Tariff AFC Annual Fixed Cost AHP Ash Handling Plant APH Air Pre Heater ARR Aggregate Revenue Requirement ATE Appellate Tribunal for Electricity A&G Administrative & General BHEL Bharat Heavy Electricals Ltd. BTG Boiler, Turbine and Generator CEA Central Electricity Authority CERC Central Electricity Regulatory Commission CHP Coal Handling Plant COD Commercial Operation Date CPI Consumer Price Index CPRI Central Power Research Institute CV Calorific Value CIL Coal India Limited CPRI Central Power Research Institute DCB Domestic Competitive Bidding DPR Detailed Project Report EA 2003 Electricity Act, 2003 FC Financing Charges FD Forced Draft FO Furnace Oil FSA Fuel Supply Agreement FY Financial Year GAAP Generally Accepted Accounting Principles GCV Gross Calorific Value GFA Gross Fixed Assets GoM Government of Maharashtra IBPL India Bulls Power Ltd. ICB International Competitive Bidding ID Induced Draft IWC Interest on Working Capital kcal kilo calories MERC, Order in Case No 44 of 2013 Page 8

9 kg kv kw kwh LD LDO MAT MDBFP MERC MGR Mkcal MMT MoU MSEB MSEDCL/ MAHADISCOM MSETCL MSLDC/SLDC MSPGCL MT MTPA MU MW NTPC O&M PLF PLR PPA R&M RoE RTD SFO SFOC SHR STPP STPS Kilogram kilo Volt Kilo Watt kilowatt hour Liquidated Damages Light Diesel Oil Minimum Alternative Tax Motor Driven Boiler Feed Pump Maharashtra Electricity Regulatory Commission Merry-Go-Round Million kilo calories Million Metric Tonne Memorandum of Understanding Maharashtra State Electricity Board Maharashtra State Electricity Distribution Co. Ltd. Maharashtra State Electricity Transmission Company Ltd. Maharashtra State Load Despatch Centre Maharashtra State Power Generation Company Limited Metric Tonnes Million Tonne per Annum Million Units Mega Watt National Thermal Power Corporation Operations and Maintenance Plant Load Factor Prime Lending Rate Power Purchase Agreement Repair & Maintenance Return on Equity Resistance Temperature Detector Secondary Fuel Oil Secondary Fuel Oil Consumption Station Heat Rate Super Thermal Power Plant Super Thermal Power Station MERC, Order in Case No 44 of 2013 Page 9

10 TDBFP Th.MT TPS TVS WCL WPI Turbine Driven Boiler Feed Pump Thousand Metric Ton Thermal Power Station Technical Validation Session Western Coalfields Ltd. Wholesale Price Index MERC, Order in Case No 44 of 2013 Page 10

11 1 BACKGROUND AND BRIEF HISTORY 1.1 Background This Order relates to the Petition filed by Maharashtra State Power Generation Company Limited (MSPGCL) for determination of Capital Cost and Tariff for FY for the newly commissioned Khaperkheda Unit # 5 of 500 MW capacity. MSPGCL is a Company formed under the Government of Maharashtra General Resolution No. ELA-1003/P.K.8588/Bhag-2/Urja-5 dated 24 January, 2005 with effect from 6 June, 2005 according to the provisions envisaged in Part XIII of the EA MSPGCL is a Company registered under the Companies Act, MSPGCL, in its Petition, has prayed as under: a. Approve the Capital Cost and Tariff of the unit for FY as computed. b. Allow any additional submission of MSPGCL for approval of Tariff for Khaperkheda Unit # 5 for FY c. Provide the Petitioner with the workable excel model used to determine the final tariff of the unit. d. Condone any shortcomings in the petition and allow the Petitioner to submit additional information as may be required by the Commission at a later stage. e. Allow MSPGCL to recover fixed cost and energy charges as per the tariff to be approved from MSEDCL through Energy Bills from the date of order. f. Issue appropriate directives to MSEDCL for payment of the dues to MSPGCL with respective financial year of the date of the order. g. Allow MSPGCL to recover the difference in the current tariff/provisional tariff vis-a-vis the final tariff to be approved in this petition from the date of issue of order. h. Issue any such further orders as the Commission may deem fit The Petitioner submitted that it owns eight thermal Power Stations including one Gas Power Station, and also operates and maintains hydro Stations located in the State of Maharashtra. The Petitioner submitted that having added four Units of 250 MW each (Paras Unit # 3, Paras Unit # 4, Parli Unit # 6 & Parli Unit # 7), the Company, in its endeavour to increase the power generating MERC, Order in Case No 44 of 2013 Page 11

12 capacity in the State of Maharashtra, commissioned Khaperkheda Unit # 5 on 16 April, 2012 with an installed capacity of 500 MW The Petitioner submitted that it has entered into a Power Purchase Agreement (PPA) with Maharashtra State Electricity Distribution Company Limited (MSEDCL) for supply of power from the said Unit for a period of 25 years The Petitioner submitted that the Commission vide its MYT Regulations, 2011 dated 4 February, 2011 introduced the second MYT Control Period regime in the State of Maharashtra with effect from 1 April, The Petitioner submitted that it was granted two years exemption from MYT second Control Period regime by the Commission vide its Order dated 23 August, 2011 in Case No. 44 of 2011 and accordingly, the second Control Period regime for it would be applicable from FY to FY The Petitioner submitted that in light of the aforesaid Order, it has filed the present Petition for determination of Tariff for Khaperkheda Unit # 5 for the period 16 April, 2012 to 31 March, 2013 based on MERC (Terms and Conditions of Tariff) Regulations, Admission of the current Petition and Public Hearing process A set of data gaps were forwarded to MSPGCL on 12 April, Further, the Commission raised additional data gaps to ensure adequacy of information for processing the Petition. The data gaps raised by the Commission can be grouped under the following heads: a. Methodology of arriving at original cost estimates as shown in DPR submitted b. Details of Competitive Bidding process conducted for award of various Packages c. Board approval at various levels of execution d. Justification for revision in Cost Estimates e. Verification of actual expenditure incurred f. Justification for increase in Cost under various heads g. Fuel related issues The first Technical Validation Session (TVS) was held on 17 April, During the TVS, the Petitioner made a presentation focusing on salient features of the Petition. The Petitioner also highlighted issues such as increase MERC, Order in Case No 44 of 2013 Page 12

13 in Capital Cost of the Unit as compared to original estimated cost, delays in implementation, reasons for delay, and measures taken by MSPGCL to minimize the increase in Project Cost due to time overruns. The list of individuals, who participated in the TVS held on 17 April, 2013 is provided at Appendix The second TVS was held on 9 May, During the TVS, MSPGCL presented the comparison of Capital Cost of Khaperkheda Unit # 5 with other similar projects of 500 MW Unit size. MSPGCL also presented the comparison of Capital Cost of Khaperkheda Unit # 5 with benchmarking of Capital Cost (Hard Cost) for Thermal Power Stations with Coal as fuel notified by CERC vide its Order dated 4 June, MSPGCL also presented the Fuel Supply Agreement (FSA) details of Khaperkheda Unit # 5 and performance parameters during FY In the second TVS, the Commission directed MSPGCL and Officers of the Commission to hold meetings for joint inspection of the internal files related to Khaperkheda Unit # 5. The list of individuals, who participated in the TVS held on 9 May, 2013 is provided at Appendix The Officers of the Commission held meetings in this regard with MSPGCL on 14 May, 2013, 17 May, 2013, 21 May, 2013 and 6 June, The third TVS was held on 23 May, In the third TVS, MSPGCL presented the comparison of Capital Cost of Khaperkheda Unit # 5 with Power Stations of NTPC and CERC benchmarks on Capital Cost (Hard Cost). Further, MSPGCL presented the analysis of factors impacting the IDC. The list of individuals, who participated in the TVS held on 23 May, 2013 is provided at Appendix MSPGCL submitted the replies to data gaps raised vide its letters dated 26 April, 2013, 7 May, 2013, 15 May, 2013, 30 May, 2013, 7 June, 2013 and 1 August, The Commission admitted MSPGCL s Petition on 12 June, In accordance with Section 64 of the Electricity Act, 2003, the Commission directed MSPGCL to publish its Petition in the abridged form to ensure due public participation. The Public Notice was published in the following newspapers inviting suggestions/objections from the stakeholders. MERC, Order in Case No 44 of 2013 Page 13

14 Table 1.1: Newspaper Notice of Public Hearing Name of the Newspaper Free Press journal (English) Saamna (Marathi) Pudhari (Marathi) Times of India (English) Date of Publication 20 June, The copies of MSPGCL s Petition and its Executive Summary were made available at MSPGCL s offices and on MSPGCL s website ( The copy of the Public Notice and Executive Summary of the Petition was also available on the website of the Commission ( in downloadable format. The Public Notice specified that the objections and comments, either in English or Marathi, may be filed along with the proof of service on MSGPCL The Commission received objections/suggestions/comments from 6 stakeholders in writing on the Petition filed by MSPGCL for determination of Capital Cost and Tariff of Khaperkheda Unit # 5 for FY The public Hearing in the matter was held on16 July, 2013 at 11:00 hrs. at the Commission s Office. The list of individuals who participated in the Public hearing is provided in Appendix 4. The Commission has ensured that the due process as contemplated under the law to ensure transparency and public participation was followed at every stage meticulously and adequate opportunity was given to all the persons concerned to file their say in the matter. 1.3 Organisation of the Order This Order is organised in the following six Sections: Section 1 of the Order provides a brief history of the quasi-judicial regulatory process undertaken by the Commission. For the sake of convenience, a list of abbreviations with their expanded forms has been included. Section 2 of the Order lists out the various suggestions and objections raised by the objectors in writing as well as during the Public Hearing before the Commission. Various suggestions and objections have been summarized, MERC, Order in Case No 44 of 2013 Page 14

15 followed by the response of MSPGCL and the rulings of the Commission on each of the issues. Section 3 of the Order deals with the approach of this Order. Section 4 deals with approval of Capital Cost of Khaperkheda Unit # 5. Section 5 deals with the determination of Tariff for Khaperkheda Unit # 5 for FY MERC, Order in Case No 44 of 2013 Page 15

16 2 OBJECTIONS RAISED, RESPONSE FROM MSPGCL AND COMMISSION S VIEW 2.1 CAPITAL COST Shri. Pratap Hogade, Maharashtra Veej Grahak Sanghatana, submitted that the Capital Cost of Khaperkheda Unit # 5 of 500 MW is Rs Crore, i.e., Rs Crore per MW while the Capital Cost of the recently commissioned other Units is Rs. 4.5 Crore/MW to Rs. 5 Crore/MW. He submitted that the Capital Cost of Khaperkheda Unit # 5 is almost 1.5 times higher as compared to other Units and the submission of MSPGCL should be carefully scrutinised Shri. R. B. Goenka, Vidarbha Industries Association, submitted that the capital cost approved on March 28, 2006 for Khaperkheda Unit # 5 was Rs Crore, which was inclusive of the IDC amounting to Rs Crore. He submitted that the BTG and BoP contracts awarded to M/s. BHEL on 23 January, 2007 and M/s. BGR on 3 July, 2007, respectively, totalled up to Rs Crore, which is an increase of Rs Crore in a span of 10 to 12 months. He suggested that the Commission should enquire about this escalation in the price within a span of only 10 to 12 months Shri. R. B. Goenka submitted that the contracts do not include Liquidated Damages (LD) clause, but include Price Variation Clause (PVC). He further submitted that the delay in the project and cost escalation was due to the use of poor quality material, which was rejected by quality control of MSPGCL and delay in erection by contractors and in such a case, PVC cannot be applied and LD clause should have been invoked. He also submitted that apart from PVC Clause, MSPGCL incurred additional cost on IDC, which increased from Rs Crore to Rs Crore Shri. R. B. Goenka submitted that the final project cost approved by the Board of MPSGCL on 24 May, 2010 is Rs Crore but the cost as on COD is Rs Crore which works out to be Rs Crore/MW and in today s market cost per MW cost for coal based super critical thermal power plants is between Rs Crore/MW to Rs. 5 Crore/MW. He further submitted that the capital cost of MSPGCL is almost 35 to 40% higher than market rates and the Commission should initiate an enquiry and should not approve purchase of power through this project. MERC, Order in Case No 44 of 2013 Page 16

17 2.1.5 Shri. Babanrao Chaure, Maharashtra Chamber of Commerce, Industry & Agriculture, requested the Commission to refer to the Petition of Korba Super Thermal Power Station Stage-III of 500 MW capacity for comparison and evaluation of various parameters of Khaperkheda Unit # 5. He submitted that the order for Main Plant equipment of Khaperkheda Unit # 5 was placed on BHEL in January, 2007 while that of Korba project was placed in March, 2006 and BTG equipments in both the projects were ordered from BHEL but BHEL had completed Korba Project within stipulated time as compared to Khaperkheda Unit # 5. He requested the Commission to conduct the hearing on this Petition in front of all the contractors/stakeholders as MSPGCL has submitted that the cause of delay is due to BHEL and other contractors/agencies. He further submitted that the proposal should be evaluated and reviewed considering the Petition filed by Korba Stage III project and Public Private Partnership based Indiabulls owned project of Nasik/Amravati of 1300 MW as the said Project had already been completed before time by BHEL and other contractors and is waiting for fuel linkage/rail linkage Shri. Ashok Pendse, Thane Belapur Industries Association, submitted that the Commission vide its Order dated 30 November, 2011 in Case No. 71 of 2011 has approved the PPA for 7 Units of MSPGCL. Shri. Ashok Pendse submitted that the PPA for Parli Unit # 7, Parli Unit # 8, Bhusawal Unit # 4, Bhusawal Unit # 5 and Nasik are yet to be submitted for approval. He submitted that whatever philosophy, the Commission adopts for approval of tariff for Khaperkheda Unit # 5, it will have to be repeated for all the stations for which PPA s have been signed and hence, the philosophy adopted by the Commission is crucial. Shri. Ashok Pendse submitted that Paras Unit # 3, Parli Unit # 6 and Tata Power Company-Generation s Unit # 8 were synchronised in a span of about 6 to 8 months of each other and all the three Units got equipment from BHEL. He submitted that the capital cost per MW of Paras Unit # 3 and Parli Unit # 6 is 52% higher than capital cost per MW of TPC-G Unit # 8. Shri. Ashok Pendse submitted that MSPGCL has submitted the reasons for delay because of BHEL, which is the common supplier for the said three Units. Shri. Ashok Pendse submitted that the decision of Hon ble ATE regarding allowance of pass through 50% of incremental expenses due to delay to the consumers is an adhoc decision and the Commission should not consider it in finality. MERC, Order in Case No 44 of 2013 Page 17

18 2.1.7 Shri. Ashok Pendse submitted that if MSPGCL can procure 250 MW Units at Rs Crore/MW as against the cost per MW of Rs Crore/MW of Khaperkheda Unit # 5 of 500 MW, configuration of 2x250 MW should be considered as compared to 1x500 MW. He submitted that approved capital cost per MW of Vindhyachal Super Thermal Power Station is Rs Crore/MW, NTPC Mauda is Rs Crore/MW, Essar Power Gujarat is Rs Crore/MW, Adhunik Power Chhattisgarh is Rs Crore/MW. He further submitted that while the capital cost per MW for other projects is in the range of Rs. 5 to 6 Crore/MW, the cost of Rs Crore/MW of Khaperkheda Unit # 5 is on higher side. He submitted that in case of Paras and Parli new Units, the reason for high cost was BHEL and in Khaperkheda Unit # 5, the reason is high interest cost. Shri. Ashok Pendse submitted that the capital cost per MW should be capped at Rs. 6 Crore/MW as it has implications on other projects wherein Power Purchase Agreement has been signed. MSPGCL s reply MSPGCL submitted that as per CERC norms on benchmarking of Capital Cost dated 4 June, 2012, the capital cost for newly commissioned plants of capacity 1x500 MW is Rs Crore/MW which is exclusive of taxes and duties, IDC, coal handling, unloading equipment at jetty, wagon rakes, railway siding, rolling stock, railway engine, etc. MSPGCL replied that the total cost including the above would be Rs Crore/MW and that of Khaperkheda Unit # 5 is Rs Crore/MW. MSPGCL replied that the estimates show that the capital cost of Khaperkheda Unit # 5 is as per the norms specified by CERC. MSPGCL replied that as per the prevalent industry rates, the mentioned capital cost of Rs. 4.5 to 5 Crore /MW for a 500 MW plant is not at all feasible. MSPGCL replied that the Capital Cost per MW of Rihand TPP (2x500 MW) is Rs Crore/MW, Mauda TPP (2x500 MW) is Rs Crore/MW, and Vallur TPP (2x500 MW) is Rs Crore MSPGCL replied that CERC norms indicate that for a 2x500 MW plant, the capital cost per MW reduces by approximately 16% as compared to 1x500 MW. The cost reduction is dependent on tax on equipment, interest costs, etc. MSPGCL replied that a Company with a favourable credit rating can avail loans at a lower interest rate. MSPGCL replied that it being a BBB rated entity, has higher interest cost as compared to NTPC with AAA rating. MSPGCL replied that it has put in efforts to reduce the capital cost to a great extent. MSPGCL replied that orders for BTG and BoP contracts have been placed with renowned companies under competitive bidding and Contractual MERC, Order in Case No 44 of 2013 Page 18

19 agreements with the Companies have been signed to eliminate cost overruns and time overruns. MSPGCL replied that as compared to other projects, MSPGCL has given detailed cost calculations for Khaperkheda Unit # 5, which has been determined by adequate discretion. Commission s view Regulation 30.1 of MERC (Terms and Conditions of Tariff) Regulations, 2005 specifies as under: Subject to prudence check by the Commission, the actual expenditure incurred on completion of the project shall form the basis for determination of the original cost of project The present Petition is for determination of capital cost and tariff for the newly commissioned Khaperkheda Unit # 5, for which the Commission has carried out the prudence check of Capital Cost of Khaperkheda Unit # 5. The Hon ble ATE in its order dated in Appeal No. 72 of 2010 in Para 7.2 of its order, has explained the scope of prudence check as under: The capital cost has to be determined on the basis of actual expenditure incurred on completion of the project subject to prudence check by the State Commission. The dictionary meanings of the word prudent are sensible and careful when you make judgments and decisions and avoiding unnecessary risk. The prudence check of the capital cost has to be looked into considering whether the Appellant has been careful in its judgments and decisions while executing the project or has been careful and vigilant in executing the project Thus, the scope of prudence check is to examine whether the Petitioner has been careful and vigilant in taking decisions while executing the project. The Commission has hence, looked into the justification given by MSPGCL in respect of any change in scope of items of work, reasons for increase in cost as compared to estimated cost, reasons for delay in project and process of awarding various contracts. As regards the comparison of Capital Cost with other projects, the Commission is of the view that such analysis is important to analyse the price trends, but such a comparison cannot be absolute in determining the prudence of cost incurred for a particular project as the cost of project varies from project to project depending on the ground realties and project specific features. The prudence check carried out by the Commission MERC, Order in Case No 44 of 2013 Page 19

20 in approving the Capital Cost of Khaperkheda Unit # 5 is detailed in further Sections of this Order As regards the increase in Capital Cost in ordering Cost vis a vis Capital Cost originally approved by the Board, MSPGCL in its submissions has mentioned that the original estimates of Khaperkheda Unit # 5 were mere estimates while the Ordering Cost was the cost discovered through Competitive Bidding Process for the award of respective packages. The Commission has gone through the details of Contracts Awarded while carrying out the prudence check of the Capital Cost as detailed in further Sections of this Order. 2.2 TARIFF Shri. Pratap Hogade submitted that considering the fixed cost of Rs Crore and generation of MU for FY , the fixed cost per kwh is Rs Shri. Pratap Hogade submitted that in future, assuming a PLF of 75%, the generation would be 3285 MU and fixed cost per kwh would be Rs which is also on the higher side. Shri. Pratap Hogade also submitted that the Energy Charge of Rs. 3.21/kWh during stabilisation period and Rs. 2.84/kWh post stabilisation period is also on the higher side Shri. R. B. Goenka submitted that the sum of projected fixed cost for FY of Rs. 2.99/kWh and variable cost of Rs. 2.96/kWh is Rs. 5.95/kWh and this is very high in today s market scenario. Shri. R. B. Goenka submitted that the PLF of 32.85% during the stabilisation period and 51.68% post stabilisation period indicates inefficient working of MSPGCL. Shri. R. B. Goenka submitted that for super critical thermal power plant the coal consumption of E grade coal is about 0.65kg/kWh, and hence the variable cost at 100% efficiency considering oil consumption should be about Rs. 0.95/kWh. Shri. R. B. Goenka submitted that even at 50% efficiency, the variable cost should not be more than Rs. 1.8/kWh. He further submitted that the high cost of power from Khaperkheda Unit # 5 should not be permitted to be purchased by MSEDCL as cheaper power is available in the market Shri. R. B. Goenka submitted that there are number of Captive Power Plants and private power plants that are kept idle as MSEDCL had denied purchase of power even at Rs per unit. Shri. R. B. Goenka submitted that in the Power Exchanges, the average power cost in last 3 months is ranging from Rs. 2/unit to Rs. 2.5/unit. Shri. R. B. Goenka submitted that the Commission had MERC, Order in Case No 44 of 2013 Page 20

21 approved power purchase rates of MSEDCL from JSW at Rs. 3.54/kWh, Adani Power at Rs. 2.55/kWh, EMCO at Rs. 2.87/kWh and IBPL at Rs. 3.26/kWh. Shri. R. B. Goenka requested the Commission to direct MSEDCL to purchase power in merit order system only Shri. Babanrao Chaure submitted that in its Petition, MSPGCL had not shown the detailed tariff working. Shri. Babanrao Chaure submitted that MSPGCL is deviating from the principles of determination of Tariff. He submitted that the Annual Fixed Charges of Khaperkheda Unit # 5 are Rs Crore and rate of Energy Charge per unit is Rs. 2.96/kWh against Paise/kWh of Korba Project and hence, Khaperkheda Unit 5 rates are 3.61 times higher than Korba Project Shri. Raksh Pal Abrol, Bharatiya Udhami Avam Upbhokta Sangh, submitted that the Annual Fixed Charges for Khaperkheda Unit # 5 for FY is Rs Crore and Variable Cost is Rs. 2.96/kWh. He submitted that the data submitted by MSPGCL for Khaperkheda Unit # 5 for FY is not comparable with the parameters approved by the Commission for Dahanu Generating Station of 500 MW of Reliance Infrastructure Company Limited - Generation for FY , which utilises Domestic Coal and Imported Coal. He submitted that the Commission should carry out the analysis of the figures provided by MSPGCL for Khaperkheda TPS and of Unit # 5 of 500 MW capacity Shri. Ashok Pendse submitted that Tata Power Company-Generation can procure coal from mines in Australia and domestic coal is available to MSPGCL and hence, MSPGCL has advantage of 20% in respect of energy cost. He submitted that the fixed cost of Khaperkheda is Rs. 2.38/kWh and variable cost is Rs. 1.77/kWh at 80% PLF and Rs. 2.52/kWh at 56% PLF and hence, the total cost is Rs /kWh. He further submitted that the fixed cost of Khaperkheda Unit # 5 is very high in comparison to that of M/s Adani at Rs. 1.11/kWh Shri. George John submitted that the Fixed Charges for FY is Rs. 596 Crore and considering 3500 MU, the rate of Fixed Charge at Rs. 1.70/kWh is very high. Shri. George John requested for the following information with regard to Khaperkheda Unit # 5: a. MU generated during Stabilisation period b. MU generated post Stabilisation period MERC, Order in Case No 44 of 2013 Page 21

22 c. Rate of depreciation considered and amount on which depreciation is worked out d. Working capital, Rate of interest considered for working capital and duration for which working capital is computed e. Equity base considered for computation of RoE and rate of return considered f. Variable Charge for FY g. Variation in Heat rate during Stabilisation Period and post Stabilisation period. MSPGCL s reply MSPGCL replied that the components of fixed costs are Depreciation, Interest on Loan, O&M costs, RoE and income tax as per Regulations. MSPGCL replied that inadequate coal supply of around 62.59% of the contracted amount during the stabilization period led to reduced generation. MSPGCL replied that it is noteworthy to highlight that projects of approximately MW capacity have been delayed due to shortage of coal and in view of the scarcity of coal all over the country, CIL has issued directives of blending of imported coal with domestic coal; the import of the same has to be undertaken by the power producers. MSPGCL replied that this would lower the fixed costs but simultaneously raise the variable cost of generation. MSPGCL replied that it is making efforts to maximize generation and has used blended coal as stipulated. Commission s view The Commission has notified the MERC (Terms and Conditions of Tariff) Regulations, 2005, the applicability of which has been extended till FY for MSPGCL. In the said Regulations, the Commission has laid out the principles for determination of Annual Fixed Charges and Energy Charges for a Generating Station. The Commission had also specified the norms of Availability, Auxiliary Energy Consumption, Gross Station Heat Rate, Secondary Oil Consumption and Transit Loss for operation of Thermal Generating Stations in the Regulations. MERC Tariff Regulations, 2005 also specifies the mechanism of sharing of gains and losses on account of controllable and uncontrollable factors. The Commission has approved the Fixed Charges and Energy Charge of Khaperkheda Unit # 5 for FY in accordance with the provisions of MERC Tariff Regulations, 2005, as discussed in detailed in subsequent Sections of the Order. MERC, Order in Case No 44 of 2013 Page 22

23 2.3 MERIT ORDER DESPATCH Shri Pratap Hogade submitted that the power purchase cost of MSEDCL through medium term/short term sources is Rs. 4/kWh to Rs. 4.25/kWh and the power purchase cost through long term PPA is much lesser. He submitted that price of electricity from Adani is Rs. 2.64/kWh, Jindal is Rs. 3.33/kWh, Mundra is Rs. 2.52/kWh, India Bulls is Rs. 3.28/kWh and from short and medium term market at Rs. 4/kWh. Shri. Pratap Hogade submitted that in view of availability from cheaper generation sources, power should not be bought at higher price from Khaperkheda Unit # Shri Pratap Hogade submitted that MSEDCL and other Distribution Licensees are bound to procure power from low cost generation sources in accordance with the provisions of Merit Order Despatch. He requested the Commission that power should be bought only from low cost Units of MSPGCL in accordance with the provisions of Merit Order Despatch. Shri. Pratap Hogade submitted that allowing procurement of power from sources with high cost of generation would encourage inefficiency in the form of lower PLF and would contradict with the spirit of competition envisaged in Electricity Act, 2003 and consumer protection rights. Shri. Pratap Hogade requested the Commission to give appropriate directions in this regard. MSPGCL s reply MSPGCL replied that the Commission had approved the PPA between MSPGCL and MSEDCL after due regulatory process. MSPGCL replied that as per the principles of tariff determination for actual recovery of costs, satisfactory performance of the generation as per norms is required and in case of underperformance, the Commission does not allow recovery of variable cost and fixed costs recovery is also reduced on a pro-rata basis, which has been faced by MSPGCL. MSPGCL replied that SLDC is authorized to determine the load dispatch schedule and the principles of merit order dispatch is followed and the directive of the SLDC is binding on the utilities. MSPGCL replied that all new Units of MSPGCL have tariffs determined separately whereas old Units have cumulative tariff. MSPGCL replied that similarly the tariff of Khaperkheda Unit # 5 will be determined separately from other Units and the same will be taken into account in merit order dispatch. MSPGCL replied that Merit order dispatch is followed in Maharashtra in the strict sense of the term. MERC, Order in Case No 44 of 2013 Page 23

24 Commission s view The present ABT mechanism allows MSLDC to schedule energy by applying merit order to the entire State of Maharashtra. In this mechanism, all the generating Units of the State are ranked in the order of the variable cost and the costliest Unit is dispatched the last. 2.4 PROJECT MANAGEMENT During Public Hearing, Shri. Sridhar stated that the project administration and implementation of MSPGCL should be in an efficient manner to safeguard the interest of the consumers. MSPGCL s reply In response to the comments received, MSPGCL in its reply stated that the project was efficiently monitored and managed by the Project Department and review of same is taken at Head Office periodically. Commission s view The Commission is of the view that the project management technique of MSPGCL needs to be improved further and proper co-ordination with major contractors should be done for a focused approach to ensure timely completion of all stages of the project. MERC, Order in Case No 44 of 2013 Page 24

25 3 APPROACH OF THIS ORDER MSPGCL filed the present Petition for determination of Capital Cost and Tariff of Khaperkheda Unit # 5 for FY under Sections 61, 62 and 86(1)(a)(b) of the Electricity Act, 2003 and Part E of MERC (Terms and Conditions of Tariff) Regulations, It is to be noted that MERC (Terms and Conditions of Tariff) Regulations, 2005 were applicable till the end of FY The Commission notified the MERC (Multi Year Tariff) Regulations, 2011 to be applicable from FY to FY However, the Commission exempted MSPGCL from applicability of MERC MYT Regulations, 2011 for a period of 2 years through its Order dated 23 August, 2011 in Case No. 44 of The said dispensation reads as follows: There is no choice but to enable the Petitioner to file its ARR and Tariff filings under the Maharashtra Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations, In light of the above, the Commission is of the view that it has become necessary to invoke the proviso to Regulation 4.1 of MYT Regulations, 2011 in order to exempt the determination of tariff of the Petitioner under the Multi- Year Tariff framework till March 31, 2013 (i.e., for a period of 2 years). The said exemption is hereby granted. The Commission is also empowered under Regulation 100 of MYT Regulations, 2011 to remove any difficulty arising in giving effect to the provisions of MYT Regulations, Hence, the Commission in this Order has approved the Capital Cost and Tariff of Khaperkheda Unit # 5 for FY in accordance with MERC (Terms and Conditions of Tariff) Regulations, MERC, Order in Case No 44 of 2013 Page 25

26 4 CAPITAL COST OF KHAPERKHEDA UNIT # Capital Cost of Khaperkheda Unit # As regards Capital Cost, Regulation 30.1 of MERC Tariff Regulations, 2005 specifies as under: Subject to prudence check by the Commission, the actual expenditure incurred on completion of the project shall form the basis for determination of the original cost of project. The original cost of project shall be determined based on the approved capital expenditure actually incurred up to the date of commissioning of the generating station and shall include capitalised initial spares subject to following ceiling norms as a percentage of the original cost as on cut-off date: (i) Coal-based/lignite-fired generating stations - 2.5% (ii) Gas Turbine/Combined Cycle generating Stations 4.0% (iii) Hydro power generating stations 1.5% Provided that where the power purchase agreement entered into between the Generating Company and the Distribution Licensee provides a ceiling of actual expenditure, the original cost of project shall not exceed such ceiling for the purpose of these Regulations: Provided further that in case of the existing generating stations, the actual original cost of project recorded in the books of account of the Generating Company, subject to prudence check by the Commission, shall be considered as the original cost of project for the purpose of these Regulations MSPGCL submitted that the proposal for developing 500 MW Khaperkheda Unit # 5 was approved by the Board of MSPGCL vide the Board Resolution MSPGCL/BM-9/Item-5 dated 28 March, MSPGCL submitted that as per the said Resolution, the approved cost estimates were for Rs Crore and it included hard cost of Rs Crore and IDC of Rs. 148 Crore. MSPGCL submitted that IDC was calculated at a notional rate of 7.5%. MSPGCL submitted that it had placed the BTG contract with M/s BHEL on 23 January, 2007 and M/s BGR was appointed for undertaking the BoP works on 3 July, MERC, Order in Case No 44 of 2013 Page 26

27 4.1.3 MSPGCL submitted that the capital cost approved by its Board was indicative in nature and should not be considered as base cost. MSPGCL submitted that the project cost capitalised on the Date of Commercial Operation of the Unit is Rs Crore and it includes hard cost of Rs Crore and IDC of Rs Crore. The comparison of various components of Capital Cost as per Orders placed for various packages of the Project (i.e., Ordering Cost) and actual cost incurred (i.e., Cost as on COD) as submitted by MSPGCL is given in Table below: Table 4.1: Comparison of Ordering Cost and Cost as on COD submitted by MSPGCL (Rs. Crore) Particulars Ordering Cost Cost as on COD Land & Site Development BTG BoP Civil Works Construction & Pre- Commissioning activities Overheads IDC * Total *Calculated MSPGCL submitted that the key reasons for deviation in Ordering Cost vis-avis the cost as on COD are as below: a. Certain works in BTG, BoP Electrical and Mechanical and BoP Civil which were supposed to be completed within COD are now in progress beyond COD. MSPGCL submitted that these balance works are now proposed to be completed within the cut-off date and capitalized under additional capitalization. b. The BTG contract has a price variation clause subject to a ceiling of 20% on the overall increase on account of indexed prices. c. The difference in ordering cost and cost as on COD of Construction and Pre-Commissioning activities is mainly due to the cost of fuel (Rs Crore) used for startup power generation. MERC, Order in Case No 44 of 2013 Page 27

28 d. The project was scheduled to complete trial operations within 42 months but was commissioned in a time period of around 63 months leading to increase in IDC The analysis of submissions of MSPGCL and the Commission s ruling on various components of Capital Cost are detailed in the subsequent sections of the Order. 4.2 Background to Project Commissioning The Commission in its Order dated 10 January, 2006 in Case No. 35 of 2005 directed MSPGCL to explain through an affidavit its efforts to ensure the implementation of its capacity addition programme as planned. Subsequently, MSPGCL filed an affidavit before the Commission vide letter dated 29 April, 2006 enclosing the DPR of Khaperkheda Unit # 5 along with other Units under its Capacity Addition Programme. The Commission on assessing the capacity addition programme submitted by MSPGCL with reference to the provisions of the Electricity Act, 2003, Tariff Policy and Tariff Regulations accorded the inprinciple clearance of the proposed capacity addition programme vide its letter dated 14 July, In the said DPR of Khaperkheda Unit # 5, MSPGCL has estimated a cost of Rs Crore including IDC MSPGCL submitted that the proposal for developing 500 MW Khaperkheda Unit # 5 was approved by its Board vide the Board Resolution MSPGCL/BM- 9/Item-5/ dated 28 March, As per the said resolution, the approved cost estimate was for Rs Crore. In the said Board Resolution, the Board concluded to invite International Competitive Bidding (ICB) tenders for Main Plant Package and separate tenders through Domestic Competitive Bidding (DCB) for BoP Package including the civil works for Main Plant Package MSPGCL submitted that it had initiated ICB process for award of BTG and M/s Ansaldo Caldie SpA (local associate in India: M/s Monnet Projects India Ltd.), M/s BHEL and M/s Doosan Heavy Industries & Construction Co. Ltd. purchased the bid documents. MSPGCL submitted that pursuant to ICB process, M/s BHEL emerged as the sole participant and was found to qualify the requirements of the RFP and the order was placed on M/s BHEL on 23 January, MERC, Order in Case No 44 of 2013 Page 28

29 4.2.4 MSPGCL submitted that pursuant to Domestic Competitive Bidding, the contract for BoP and other works was placed on M/s BGR Energy Systems on 3 July, MSPGCL submitted that out of 10 bidders who purchased the tender document, only four bidders submitted their bid and the lowest bidder M/s BGR was awarded the Contract for BoP and the civil and structural works of Main Plant. The details of Award of BoP package as submitted by MSPGCL is given in the Table below: Table 4.2: Award of BoP Package submitted by MSPGCL Package Agencies participated Qualified Agencies Final Order placed on BoP (Electrical, 1) Tata Projects Ltd. 1) Tata Projects Ltd. GEA Energy Mechanical and 2) L&T Ltd. 2) Reliance Energy Ltd. Systems (I) Ltd. Civil) 3) Reliance Energy Ltd. 3) GEA Energy Systems (I) (Later named as 4) GEA Energy Systems (I) Ltd. (Later named as BGR Energy Systems Ltd.) Ltd. (Later named as BGR Energy Systems Ltd.) BGR Energy Systems Ltd.) MSPGCL submitted that in order to ensure least cost principle, it had adopted the conventional route of inviting tenders through Competitive Bidding process for placement of associated auxiliaries and sub-systems for Khaperkheda Unit # 5. MSPGCL submitted that the following agencies were awarded the other works of Khaperkheda Unit # 5 through DCB as per details given in Table below: Table 4.3: Award of other Packages submitted by MSPGCL S. Final Order Package Agencies participated Qualified Agencies No. Placed on 1 C.W. & R.W. Ozonisation 2 Civil Works (Staff Quarters) 1) M/s.SMS Infrastructure Ltd., Nagpur 2) M/s.Ozone Research & Applications Pvt. Ltd., Nagpur 1) M/s.Ozone Research & Applications Pvt. Ltd., Nagpur 2) M/s. Fluid Technologies, Raipur M/s.Ozone Research & Applications Pvt. Ltd., Nagpur 3) M/s. Fluid Technologies, Raipur 1) M/s.Shah Construction 1) M/s.Shah Construction M/s.Shah 2) M/s Nagarjun Construction 2) M/s Nagarjun Construction Construction 3) M/s Laxmi Engineering 3) M/s Laxmi Engineering 4) M/s Metcon India 4) M/s Metcon India Date of Award 7 February, June, 2007 MERC, Order in Case No 44 of 2013 Page 29

30 S. Final Order Date of Package Agencies participated Qualified Agencies No. Placed on Award 3 Civil Works (Railway Sliding) 4 Civil Works (Railway Sliding) 5 Civil Works (Ash Bund) 6 Civil Works (Ash Bund) 1) M/s.ARSS Infrastructure 1) M/s.ARSS Infrastructure M/s SMS 22 2) M/s Indrajit Singh Chhabra 2) M/s Indrajit Singh Chhabra Infrastructure October, 3) M/s Suresh Chand Gupta 3) M/s Suresh Chand Gupta ) M/s SMS Infrastructure 4) M/s SMS Infrastructure 5) M/s NMC Industries 1) M/s.ISC Project 1) M/s.ISC Project M/s.ISC Project 21 2) M/s Suresh Chanda Gupta 2) M/s Suresh Chanda Gupta October, ) M/s. Ketan Construction 1) M/s MG Bhangdiya M/s Sunil Hitech - 2) M/s MG Bhangdiya 2) M/s Anoj Kumar Agarwal Engineer Ltd 3) M/s Anoj Kumar Agarwal 3) M/s R.N.Nayak & Sons 4) M/s R.N.Nayak & Sons 4) M/s SMS Infrastructure Limited 5) M/s SMS Infrastructure 5) M/s Sharda Construction & Limited Corporation 6) M/s Sharda Construction & 6) M/s Sunil Hitech Engineer Corporation Ltd 7) M/s Sunil Hitech Engineer 7) M/s Srihari Associates Pvt. Ltd Ltd. 8) M/s Srihari Associates Pvt. Ltd. 1) M/s. Abhi Engineering 1) M/s SMS Infrastructure M/s B.C Biyani - Corporation Projects Pvt. Ltd. 2) M/s SMS Infrastructure 2) M/s B.C Biyani Projects 3) M/s Bhavana Energy Pvt. Ltd. Infrastructure Pvt. Ltd. 4) M/s B.C Biyani Projects Pvt. Ltd MSPGCL submitted that it is empowered to utilise the services of Government Institute and Government undertaking on single quotation basis and in exercise of such powers, the order for consultancy of Project Management for Railway Siding was placed on M/s RITES on single quotation basis after assessing the reasonability of the offer, specialised nature of work and expertise of M/s RITES in executing similar type of work MSPGCL submitted that its Board has approved the revised cost estimates of Khaperkheda Unit # 5 vide the Board Resolution MSPGCL/BM-69/Item-69.17/ dated 24 May, MSPGCL submitted that Power Finance Corporation MERC, Order in Case No 44 of 2013 Page 30