Case No. 66 of Smt. Chandra Iyengar, Chairperson Shri Vijay L. Sonavane, Member

Transcription

1 Before the MAHARASHTRA ELECTRICITY REGULATORY COMMISSION World Trade Centre, Centre No.1, 13 th Floor, Cuffe Parade, Mumbai Tel /65/69 Fax Website: / Case No. 66 of 2014 In the matter of Petition filed by Maharashtra Eastern Grid Power Transmission Company Limited (MEGPTCL) for approval of its Aggregate Revenue Requirement and determination of Multi-Year Tariff for the second Control Period from FY to FY Smt. Chandra Iyengar, Chairperson Shri Vijay L. Sonavane, Member Maharashtra Eastern Grid Power Transmission Company Limited (MEGPTCL)...Petitioner Order Date: 8 August, 2014 Upon directions from the Maharashtra Electricity Regulatory Commission (Commission or MERC), Maharashtra Eastern Grid Power Transmission Company Limited (MEGPTCL), filed a Petition for approval of its Aggregate Revenue Requirement and determination of Multi-Year Tariff for the second Control Period from FY to FY , under affidavit. 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 MEGPTCL, issues raised during the Public Hearing, and all other relevant material, approves the Aggregate Revenue Requirement and determines the Multi-Year Tariff for MEGPTCL for the second Control Period from FY to FY as under: Order Case No. 66 of 2014 Page 1 of 79

2 TABLE OF CONTENTS LIST OF TABLES... 4 ABBREVIATIONS BACKGROUND AND BRIEF HISTORY Incorporation of MEGPTCL and issue of Transmission Licence Commission s Order on approval of MYT Business Plan for MEGPTCL for the second Control Period Relevant provisions under MERC MYT Regulations for filing of the Multi-Year Tariff Petition Admission, Public Hearing process and approval of MYT Petition Organisation of the Order PUBLIC HEARING AGGREGATE REVENUE REQUIREMENT FOR THE MYT SECOND CONTROL PERIOD Background Commissioning schedule and related details Methodology for computing various ARR components Capital expenditure and capitalisation Operations & Maintenance expenses Depreciation Interest on long term loan Interest on working capital Contribution to contingency reserves Return on Equity (ROE) Income Tax Other expenses Non-Tariff income Approval of Aggregate Revenue Requirement RECOVERY OF TRANSMISSION CHARGES COMPLIANCE OF DIRECTIVES UNDER THE MYT BUSINESS PLAN ORDER Background of Directives Audited Financial Statements Impact of contractors delay on capital cost Setting off of escalation towards completion cost and contingency Revised Date of Commissioning & details of the assets put to use Scope of work under deposit work for extension of Aurangabad substation Impact of change in risk profile of transmission project on the interest rate Risks identified by the Commission Order Case No. 66 of 2014 Page 2 of 79

3 5.9 Detailed plan on the measures and strategies for safe operations APPLICABILITY OF THE ORDER SUMMARY OF RULINGS Approval of the capital cost Approval of the ARR for the second Control Period APPENDIX Order Case No. 66 of 2014 Page 3 of 79

4 LIST OF TABLES Table 3-1: Commissioning schedule submitted by MEGPTCL Table 3-2: Commissioning Schedule considered by the Commission for the MYT Order Table 3-3 Variation in transmission line length as submitted by MEGPTCL Table 3-4: Comparison of capital cost: In-principle approval, Business Plan approval and revised submission in MYT Petition Table 3-5: Revised capital cost of MEGPTCL pursuant to statutory auditor s certificate Table 3-6: Set-wise provisional capital cost approved by the Commission Table 3-7: Capitalisation proposed by MEGPTCL Table 3-8: Capitalisation approved by the Commission Table 3-9: O&M expenses proposed by MEGPTCL Table 3-10: O&M expenses approved by the Commission Table 3-11: O&M expenditure including lease rentals for Akola II substation approved by the Commission Table 3-12: Depreciation proposed by MEGPTCL Table 3-13: Depreciation approved by Commission Table 3-14: Interest on Long-term Loans proposed by MEGPTCL Table 3-15: Source of Funding and Debt-Equity as proposed by MEGPTCL Table 3-16: Interest on Long-term Loans approved by the Commission Table 3-17: Interest on working capital proposed by MEGPTCL Table 3-18: Interest on working capital approved by the Commission Table 3-19: Contribution to contingency reserve proposed by MEGPTCL Table 3-20: Contribution to contingency reserve approved by the Commission Table 3-21: Return on Equity proposed by MEGPTCL Table 3-22: Return on Equity approved by the Commission (Rs Crore) Table 3-23: Income - Tax proposed by MEGPTCL Table 3-24: Income Tax approved by the Commission Table 3-25: Other expenses as submitted by MEGPTCL Table 3-26: Other expenses approved by the Commission Table 3-27: Non-Tariff Income as proposed by MEGPTCL Table 3-28: Non-Tariff Income approved by the Commission Table 3-29: Aggregate Revenue Requirement as submitted by MEGPTCL Table 3-30: Aggregate Revenue Requirement approved by the Commission Table 7-1: Summary of Aggregate Revenue Requirement approved by the Commission Order Case No. 66 of 2014 Page 4 of 79

5 ABBREVIATIONS A&G ABT ALDC AMC APML-T APTCL APR ARR BSM CACMAI Capex CEA CERC COD CPD CPI CSR CWIP DA DPR EAR ED EPC FBSM FERV FY GFA GoM ICB Administrative and General Availability Based Tariff Area Load Despatch Centre Annual Maintenance Charges Adani Power Maharashtra Limited Transmission Business Amravati Power Transmission Company Limited Annual Performance Review Aggregate Revenue Requirement Balancing and Settlement Mechanism Cable And Conductor Manufacturers Association of India Capital Expenditure Central Electricity Authority Central Electricity Regulatory Commission Date of Commercial Operation Co-incident Peak Demand Consumer Price Index Corporate Social Responsibility Capital Work in Progress Dearness Allowance Detailed Project Report Erection All Risk Excise Duty Engineering, Procurement and Commissioning Final Balancing Settlement Mechanism Foreign Exchange Rate Variation Financial Year Gross Fixed Assets Government of Maharashtra International Competitive Bidding Order Case No. 66 of 2014 Page 5 of 79

6 IDC IEEMA INR InSTS IPP IPTC IWC JPTL LD LIBOR MAT MoP MEGPTCL MERC MSETCL MSLDC NCPD NHAI O&M PGCIL PLR R&M RoE RoW SBI SLDC STU SWOT TTSC TVS Interest During Construction Indian Electrical and Electronics Manufacturers Association Indian Rupees Intra-State Transmission System Independent Power Producer Independent Private Transmission Company Interest on Working Capital Jaigad Power Transmission Limited Load Despatch London Interbank Offered Rate Minimum Alternate Tax Ministry of Power Maharashtra Eastern Grid Power Transmission Company Limited Maharashtra Electricity Regulatory Commission Maharashtra State Electricity Transmission Company Limited Maharashtra State Load Despatch Centre Non-coincident Peak Demand National Highways Authority of India Operation & Maintenance Power Grid Corporation of India Limited Prime Lending Rate Repairs and Maintenance Return On Equity Right of Way State Bank of India State Load Despatch Centre State Transmission Utility Strengths Weaknesses Opportunities Threats Total Transmission System Cost Technical Validation Session Order Case No. 66 of 2014 Page 6 of 79

7 USD VAT WPI United States Dollar Value Added Tax Wholesale Price Index Order Case No. 66 of 2014 Page 7 of 79

8 1 Background and brief history A Petition has been filed by Maharashtra Eastern Grid Power Transmission Company Limited, a Transmission Licensee, for approval of the Aggregate Revenue Requirement and determination of Multi-Year Tariff for the second Control Period from FY to FY , under Sections 61 and 62 of the Electricity Act, 2003 and Regulation 16, 18 and Part G of the MERC (Multi-Year Tariff) Regulations, 2011 (hereinafter referred to as MERC MYT Regulations ) as amended from time to time. Maharashtra Eastern Grid Power Transmission Company Limited (hereinafter referred to as MEGPTCL ) has been granted Transmission Licence No. 1 of 2010 by the Commission vide its Order dated 21 September, The subsequent paragraphs outline details of the evolution of the Regulatory regime for transmission pricing in Maharashtra, Commission s previous Orders pertaining to MEGPTCL, the supporting Regulatory framework for MYT filing, the Regulatory process adopted and the prayers of the Petitioner in the present matter. 1.1 Incorporation of MEGPTCL and issue of Transmission Licence Adani Enterprises Limited (AEL) had proposed to MSETCL to undertake development of the 765 kv transmission system as outlined in the STU s transmission network plan for to in JV arrangement operating on Build, Own and Operate (BOO) basis with equity participation in the proportion of 74:26 respectively. Accordingly, MSETCL Board of Directors accorded in-principle approval for formation of JV However, in view of pending approval from Government of Maharashtra (GoM) for MSETCL s participation in the JV, AEL secured No Objection certificate from MSETCL vide letter dated 2 July, 2010 to proceed with development of the project, in the interest of time, with an obligation to arrange for additional 26% equity contribution by the Petitioner in case of delay or non-receipt of Government of Maharashtra (GoM) approval for 26% equity investment by MSETCL in JV. The Commission had noted the same in its Order in Case No. 118 of 2009 issued on 14 September, After conducting the due Regulatory process, the Commission vide its Order dated 14 September, 2010 granted transmission Licence for a period of 25 years to MEGPTCL, for the proposed 765 kv Intra-State Transmission System as per the detailed scope in Para No. 2 of the said Order. The Transmission Licence came into effect from 21 September, Subsequently, MSETCL informed AEL, with copy to the Commission vide letter No. MSETCL/CO/C&M/Contracts-V/JV/MEGPTCL/17787 dated 27 December, 2012, about its decision to not enter into a JV with AEL in MEGPTCL. However, as per the Order Case No. 66 of 2014 Page 8 of 79

9 No Objection certificate, AEL proceeded with contributing full equity for MEGPTCL and accordingly, MEGPTCL became wholly owned subsidiary of AEL. 1.2 Commission s Order on approval of MYT Business Plan for MEGPTCL for the second Control Period As per MERC (MYT) Regulations, 2011, MEGPTCL had filed its Petition before the Commission for approval of Multi Year Tariff Business Plan for the MYT second Control Period from FY to FY on 23 September, The Commission, in exercise of the powers vested in it under Section 61 and Section 62 of the Electricity Act, 2003 and all other powers enabling it in this behalf, and after taking into consideration all the submissions made by MEGPTCL, issues raised during the Public Hearing, and all other relevant material, issued the Order on 15 January, 2014 in Case No. 128 of 2013 in the above matter and directed MEGPTCL to file its Petition for determination of Multi-Year Tariff within 60 days from the date of the Business Plan Order. 1.3 Relevant provisions under MERC MYT Regulations for filing of the Multi-Year Tariff Petition The Commission, in exercise of the powers conferred by the EA 2003, notified the Maharashtra Electricity Regulatory Commission (Multi Year Tariff) Regulations, 2011, (hereinafter referred as the MERC MYT Regulations) on 4 February, These Regulations are applicable for the second Control Period starting from FY to FY The said Regulations were amended by Maharashtra Electricity Regulatory Commission (Multi Year Tariff) (First Amendment) Regulations, 2011 vide notification dated 21 October, The Regulation 16 of the MERC MYT Regulations specifies the procedure relating to making an application for determination of Tariff by a Generating Company or a Transmission Licensee or a Distribution Licensee. Further, the Regulation 18 specifically mentions that the applicant shall provide, based on the approved Business Plan, as part of its application to the Commission, in such form as may be stipulated by the Commission from time to time, full details of its calculation of the Aggregate Revenue Requirement and expected revenue from Tariff and Charges pursuant to the terms of its Licence. Accordingly, the Petition for approval of the Aggregate Revenue Requirement and determination of Multi-Year Tariff for the second Control Period from FY to FY was filed by MEGPTCL in accordance with the provisions of the MERC MYT Regulations. Order Case No. 66 of 2014 Page 9 of 79

10 1.4 Admission, Public Hearing process and approval of MYT Petition MEGPTCL, complying with the requirements under the MERC MYT Regulations and the directive of the Commission in the Business Plan Order dated 15 January, 2014 in Case No. 128 of 2013 to file MYT Petition within 60 days from the issue of the Business Plan Order, submitted the Petition for approval of Aggregate Revenue Requirement and determination of Multi-Year Tariff for the FY to FY of the second Control Period under affidavit on 5 March, Subsequently, based on the preliminary review, the Commission communicated data gaps vide dated 11 April, MEGPTCL submitted its responses to the said data gaps on 15 April, The Technical Validation Session (TVS) was held on 15 April, The list of persons who participated in the Technical Validation Session is provided at Appendix-1. The details of the issues discussed during the TVS are elaborated in the next Section of the Order Thereafter, as directed by the Commission, discussions were held between the Petitioner and MERC officials on 15 April, 2014 and 23 April, 2014 regarding the response to the data gap set 1 submitted by the Petitioner as well as to discuss the reasons for the significant escalation in the project cost as submitted in the MYT Petition from that provisionally approved in the Business Plan Order by the Commission on 15 January, The Petitioner was directed by the Commission to submit a revised Petition incorporating the responses to the data gaps and the justification for escalation of project cost from the Business Plan approval Order during the TVS. Further data gaps were also communicated to the Petitioner on 23 April, 2014 subsequent to the discussion. Subsequently another discussion session between the Petitioner and MERC officials was organised on 29 April, 2014 regarding the observations on the response to the data gap set 1 submitted by the Petitioner and especially the reasons of cost escalation between the period from the approval of the Business Plan Order by the Commission dated 15 January, 2014 and filing of the MYT Petition by MEGPTCL. Further, on 30 April, 2014, the Commission issued the Minutes of Meeting (MoM) for the TVS dated 15 April, Accordingly, the Petitioner submitted a revised Petition for the approval of its Aggregate Revenue Requirement and determination of Multi-Year Tariff for the second Control Period from FY to FY on 2 May, 2014 taking into account the various data gaps communicated by the Commission, the discussions between MEGPTCL, MERC officials and the responses of MEGPTCL i.e. the Petitioner thereto under affidavit with the following prayers. Admit the present Petition. Approve Aggregate Revenue Requirement (ARR) of MEGPTCL for the second control period as submitted herewith. Order Case No. 66 of 2014 Page 10 of 79

11 Allow timely recovery of ARR for FY from the date of Commercial Operation through Order for this Petition/any other Order/Transmission Tariff Order for InSTS or any other mechanism as deemed fit by the Commission. Allow recovery of ARR with carrying cost for the corresponding period in case of any delay in recovery of transmission charges beyond the CoD of the transmission line/its network elements. Condone any inadvertent omissions/errors/shortcomings and permit MEGPTCL to add/change/modify/alter this filing and make further submissions as may be required at a future date. Allow any other relief, order or direction, which the Hon ble Commission deems fit to be issued. Pass such further orders, as the Hon ble Commission may deem fit and appropriate, keeping in view the facts and circumstances of the case Based on the detailed review of the revised submission by the Petitioner, the Commission had communicated additional data gaps vide dated 8 May, MEGPTCL submitted its response against the said data gaps on 9 May, Considering the submissions done by the Petitioner, the Commission admitted the Petition of MEGPTCL on 19 May, In accordance with Section 64 of the EA 2003, the Commission directed MEGPTCL to publish its Multi-Year Tariff Petition in the prescribed abridged form and manner in two daily English language and two daily Marathi language newspapers having wide circulation in the area of the transmission, to ensure adequate public participation. The Commission also directed MEGPTCL to reply expeditiously to all the suggestions and objections received from stakeholders on its Petition. MEGPTCL issued the Public Notice in newspapers inviting suggestions and objections from stakeholders on its Multi-Year Tariff Petition. The Public Notice was published in two daily English language newspapers viz. The Hitavada (Nagpur edition) and Lokmat Times (Nagpur and Aurangabad editions) and in two Marathi language newspapers viz. Punyanagari (Aurangabad edition) and The Deshonnati (Nagpur and Akola editions) on 21 May, The copies of MEGPTCL s Petition and its summary were made available for inspection / purchase to members of the public at MEGPTCL s offices and on MEGPTCL 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 suggestions and objections, either in English or Marathi, may be filed in the form of affidavit along with the proof of service on MEGPTCL The Commission and the Petitioner did not receive any written suggestions or objections on the Petition. The Public Hearing was held on 17 June, 2014 at 11:30 Order Case No. 66 of 2014 Page 11 of 79

12 hours at the Commission s Office. The list of persons who participated in the Public Hearing is provided in Appendix 2. The details of the proceedings of the Public Hearing are elaborated in the Section 2 of the Order 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. 1.5 Organisation of the Order This Order is organised in the following eight Sections: Section 1 of the Order provides a summary of the Commission s previous Orders pertaining to MEGPTCL, brief outline of the Regulatory framework covering the MYT process, brief summary of the quasi-judicial Regulatory process undertaken by the Commission, and prayers of the Petitioner in the present matter. For the sake of convenience, a list of abbreviations with their expanded forms has also been included. Section 2 comprises the proceedings of the Public Hearing conducted by the Commission for the Petition. Section 3 of the Order comprises the Commission s analysis and its decision on ARR of MEGPTCL for the MYT second Control Period from FY to FY Section 4 of the Order discusses the methodology for recovery of Transmission Charges by MEGPTCL, during the MYT second Control Period. Section 5 of the Order summarises various directives given by the Commission in its Business Plan Order issued for MEGPTCL, its compliance and the Commission s Ruling in the matter. Section 6 of the Order indicates the applicability of this Order; and Section 7 of the Order provides the summary of the Commission s Rulings. Order Case No. 66 of 2014 Page 12 of 79

13 2 Public Hearing The Public Hearing for the Multi-Year Tariff Petition of MEGPTCL was held on 17 June, At the commencement of the Public Hearing, MEGPTCL made a brief presentation about its transmission system project and the progress status of the elements of the transmission system The Commission and the Petitioner have not received any suggestions/objections in relation to the Multi-Year Tariff Petition filed by MEGPTCL for the second Control Period from FY to FY During the hearing, the Commission inquired if any members of the public/stakeholders wished to make any suggestions/comments on the MYT Petition of MEGPTCL, however, no suggestions/objections/comments were made by any members of the public/stakeholders present in the Public Hearing The list of persons who participated in the Public Hearing is provided in Appendix 2. Order Case No. 66 of 2014 Page 13 of 79

14 3 Aggregate Revenue Requirement for the MYT Second Control Period 3.1 Background MEGPTCL, in its Petition, has submitted the details of its projected expenses over the MYT second Control Period from FY to FY under various heads, viz. O&M expenses, depreciation, interest on long term loan, interest on working capital, etc.. The Commission has discussed the approval of expenditure for each of the above items and Aggregate Revenue Requirement (ARR) of MEGPTCL for the MYT second Control Period from FY to FY , in the following Sections. 3.2 Commissioning schedule and related details The commissioning schedule of the transmission system as proposed by MEGPTCL in the Multi-Year Tariff Petition is as given below: Table 3-1: Commissioning schedule submitted by MEGPTCL Sr. No. Particulars 1 Tiroda Koradi- III 765 kv S/C Line-1 2 Koradi-III Akola-II 765 kv S/C Line-1 3 Akola-II Aurangabad 765 kv S/C Line-1 4 Tiroda Koradi- III 765 kv S/C Line-2 5 Koradi-III Akola-II 765 kv S/C Line-2 6 Akola-II Aurangabad 765 kv S/C Line-2 7 Akola-II Akola-I 400 kv Quad D/C Line Original Completion Schedule (as submitted in the Petition for grant of Transmission Licence) Business Plan Petition (Case No. 128 of 2013) Element Set Transmission Lines Estimated Commissioning Date Element Set MYT Petition Revised Actual/Estimated Commissioning Date March 2012 Set-2 Dec, 2013 Set-2a 23 February, 2014 March 2012 Set-2 Dec, 2013 Set-2a 23 February, 2014 March 2012 Set-2 Dec, 2013 Set-2b 8 April, 2014 August 2012 Set-3 Jul, 2014 Set-3 31 March, 2015 August 2012 Set-3 Jul, 2014 Set-3 31 March, 2015 August 2012 Set-3 Jul, 2014 Set-3 31 March, 2015 March 2012 Set-1 Dec, 2013 Set-1 23 February, 2014 Substations Order Case No. 66 of 2014 Page 14 of 79

15 Sr. No. Particulars 1 Establishment of 765/400 kv switchyard - Tiroda 2 Establishment of 765/400 kv substations - Koradi-III 3 Establishment of 765/400 kv substations - Akola-II 4 Extension of 765 kv substation Aurangabad Original Completion Schedule (as submitted in the Petition for grant of Transmission Licence) Business Plan Petition (Case No. 128 of 2013) Element Set Estimated Commissioning Date Element Set MYT Petition Revised Actual/Estimated Commissioning Date March 2012 Set-2 Dec, 2013 Set-2a 23 February, 2014 August 2012 Set-3 Jul, 2014 Set-3 31 March, 2015 March 2012 Set-2 Dec, 2013 Set-2a 23 February, 2014 August 2012 Set-3 Jul, 2014 Set-3 31 March, The Commission, vide its letter no. MERC Case No. 60/66/67/2014 No dated 8 May, 2014, had sought the details from the State Transmission Utility (STU) regarding the current status of implementation of the transmission assets of various Transmission Licensees in Maharashtra including that of MEGPTCL and if the assets have been put to use. In response, the STU vide its letter no. MSETCL/CO/C.E. STU/R&C/ dated 22 May, 2014 submitted the necessary details. On scrutiny of the details submitted by the STU, it was observed that the dates for put to use of transmission system assets of MEGPTCL corresponded with those submitted by MEGPTCL in its revised Petition. Further, the STU has also confirmed the inclusion of the same in the upcoming STU five year plan The Petitioner has submitted that as per the interim arrangement, 765 kv circuit 1 shall be connected to MSETCL s 400 kv Thaptitanda substation. Under final arrangement, the same shall be terminated at 765 kv MSETCL Aurangabad substation. The Petitioner has further submitted that it has successfully charged 765 kv S/C Akola-II Aurangabad line on 8 April, 2014 at 400 kv voltage level The Petitioner has also submitted a copy of its letter to MSETCL informing successful charging of the 765 kv Akola II Aurangabad Line 1 (on 400 kv) up to the 400 kv MSETCL interconnection point The Commission has examined the matter and sought necessary confirmation of commissioning of the said line from the STU. The STU vide letter no. Order Case No. 66 of 2014 Page 15 of 79

16 MSETCL/CO/C.E. STU/R&C/ dated 22 May, 2014 has confirmed that the line has been put to use on 8 April, Based on the material placed on record by the Petitioner and the STU letter confirming the date of commissioning, the Commission considers the commissioning of the elements for Set 1 and Set 2a on 23 February, 2014 and Set 2b as 8 April, 2014 as submitted by the Petitioner However, in case of Set 3 which includes extension of 2 bays at MSETCL s Aurangabad 765 kv substation, it is noted from the STU letter that this substation may be ready in March, 2016 and therefore, the commissioning of the corresponding bays of MEGPTCL at 765 kv Aurangabad substation may spill over beyond FY However, the Commission has considered the commissioning of Set 3 including the bays for Aurangabad 765 kv substation in March, 2015 on provisional basis. Incase of spill over of commissioning of 2 bays at MSETCL s Aurangabad 765 kv substation, the Commission shall review the impact of same during the truing up exercise Accordingly, the Set-wise commissioning schedule considered by the Commission for the purpose of the MYT Order is as given below: Table 3-2: Commissioning Schedule considered by the Commission for the MYT Order Sr. No. Particulars 1 Tiroda Koradi- III 765 KV S/C Line-1 2 Koradi-III Akola-II 765 KV S/C Line-1 3 Akola-II Aurangabad 765 KV S/C Line-1 4 Tiroda Koradi- III 765 KV S/C Line-2 5 Koradi-III Akola-II 765 KV S/C Line-2 6 Akola-II Aurangabad 765 KV S/C Line-2 Original Completion Schedule (as submitted in the Petition for grant of transmission Licence) Business Plan Petition (Case No. 128 of 2013) Element Set Estimated Commissioning Date Transmission Lines Element Set MYT Petition Revised Estimated Commissioning Date March 2012 Set-2 Dec, 2013 Set-2a 23 February, 2014 March 2012 Set-2 Dec, 2013 Set-2a 23 February, 2014 Commissioning Schedule considered by the Commission 23 February, February, 2014 March 2012 Set-2 Dec, 2013 Set-2b 8 April, April, 2014 August 2012 Set-3 Jul, 2014 Set-3 31 March, March, 2015 August 2012 Set-3 Jul, 2014 Set-3 31 March, March, 2015 August 2012 Set-3 Jul, 2014 Set-3 31 March, March, 2015 Order Case No. 66 of 2014 Page 16 of 79

17 Sr. No. Particulars 7 Akola-II Akola-I 400 KV Quad D/C Line 1 Establishment of 765/400 KV switchyard - Tiroda 2 Establishment of 765/400 KV substations - Koradi-III 3 Establishment of 765/400 KV substations - Akola-II 4 Extension of 765 KV substation Aurangabad Original Completion Schedule (as submitted in the Petition for grant of transmission Licence) Business Plan Petition (Case No. 128 of 2013) Element Set Estimated Commissioning Date Element Set MYT Petition Revised Estimated Commissioning Date March 2012 Set-1 Dec, 2013 Set-1 23 February, 2014 Substations March 2012 Set-2 Dec, 2013 Set-2a 23 February, 2014 Commissioning Schedule considered by the Commission 23 February, February, 2014 August 2012 Set-3 Jul, 2014 Set-3 31 March, March, 2015 March 2012 Set-2 Dec, 2013 Set-2a 23 February, February, 2014 August 2012 Set-3 Jul, 2014 Set-3 31 March, March, The Petitioner has also submitted that the transmission line length has undergone variation on account of involvement of forest land, mining area, agriculturally rich areas (orange orchard, fruits and shrubs) along the original route of the transmission lines. Continuing with such route covering the locations as mentioned above would have severely hampered the progress of the project and would have resulted in substantial increase in RoW cost and increase in soft cost. To avoid such consequences and to expedite the work completion, re-routing and diversion of lines became mandatory. Owing to this, the overall transmission line length has reduced by around 104 km, however, due to the inevitable zig-zag nature of the re-routed transmission line the number of angle/tension towers which cost more as compared to suspension towers has increased substantially. The revised transmission line length is given in the following table: Order Case No. 66 of 2014 Page 17 of 79

18 Table 3-3 Variation in transmission line length as submitted by MEGPTCL Sr. No. Particulars 1 Tiroda Koradi-III 765 kv S/C Line-1 2 Koradi-III Akola-II 765 kv S/C Line-1 3 Akola-II Aurangabad 765 kv S/C Line-1 4 Tiroda Koradi-III 765 kv S/C Line-2 5 Koradi-III Akola-II 765 kv S/C Line-2 6 Akola-II Aurangabad 765 kv S/C Line-2 7 Akola-II Akola-I 400 kv Quad D/C Line Business Plan Petition (Case No. 128 of 2013) MYT Petition Difference 120 km km 18.5 km 270 km km km 240 km km km 120 km km km 270 km km km 240 km km km 30 km km 0.65 km 8 Net Variation km The Commission has examined the submission of the Petitioner with regards to the variation in the transmission line length and accordingly considered the variations in the length of the transmission line for the purpose of approval of the MYT Petition. Pursuant to the above, the total length of the transmission line considered by the Commission for the purpose of approval of the MYT Petition is circuit kilometres (ckt. km) for 400 kv and ckt. km for 765 kv transmission line The components of the ARR are approved for the Multi-Year Tariff Petition considering the commissioning schedule approved by the Commission and in line with the relevant provisions of the MERC MYT Regulations, Methodology for computing various ARR components The Petitioner has submitted that in the Commission s Order dated 15 January, 2014 in Case No. 128 of 2013 for MYT Business Plan for the Petitioner, various components of the ARR namely operation and maintenance expense, depreciation, interest on loan capital, interest on working capital, return on equity capital, etc. were determined based on the estimated period for which the assets will be operational during the first year of commissioning of the Set-1 and for the subsequent years, the Order Case No. 66 of 2014 Page 18 of 79

19 Commission determined the ARR components based on the average of the opening and closing balance of the respective parameters The Petitioner has further submitted that such concept is appropriate in case of area specific Licensee where dates of commissioning of assets during a particular year are not available or there are large quantity of assets being capitalised on regular basis throughout the year instead of on a specific date. However, in case of MEGPTCL, Transmission Licence is project specific and as mentioned above, it does not reflect correct Tariff components since large value assets which are getting commissioned on a specific date are getting averaged out in the concept considered by the Commission in the Business Plan Order. This would result in either benefit or loss to the Petitioner as per the actual date of subsequent capitalisation of assets for Set The Petitioner has submitted that in its specific case, there are only four Sets for which commissioning dates are specific and known. In such a case, it would be appropriate to calculate Tariff individually from date specified for each Set without combining till the completion of financial year in which the last Set is getting commissioned. 3.4 Capital expenditure and capitalisation Capital expenditure MEGPTCL in the present Petition has estimated a project cost of Rs crore, as against the in-principle approved project cost for Rs crore and Rs crore provisionally approved by the Commission in the Business Plan Order. The same has been summarised in the table below: Table 3-4: Comparison of capital cost: In-principle approval, Business Plan approval and revised submission in MYT Petition Particulars Inprinciple Approval Business Plan (Rs. Crore) MYT Petition Preliminaries Transmission Lines Supply Order (EPC) Original contract value Quantity variation in EPC order Price escalation Foreign Exchange Rate Variation Service Order (EPC) Original contract value Quantity variation in EPC order Order Case No. 66 of 2014 Page 19 of 79

20 Particulars Inprinciple Approval Business Plan MYT Petition Additional RoW Price escalation Idling charges EAR insurance policy for the delayed period Non-EPC cost in transmission line Supply of additional initial spares Supply order for additional items Substation Works Supply Order Original contract value Quantity variation/ additional items in EPC order Additional Bays at Akola-II Price escalation Foreign Exchange Rate Variation Service Order Original contract value Quantity variation in EPC order Price escalation Demurrage/Detention/Ground Rent charges Quantity variation in civil works at Akola-II S/s Non-EPC cost Metering for Akola-II and Koradi-III S/s Supply of additional initial spares Supply orders for additional items Service orders for additional items Land for Substation Revised Taxes and Duties Overheads Project Management Consultancy services Other Overheads Contingency Pre-operative expenses Deposit work for bays at Aurangabad substation + civil work Financing and IDC Impact of foreign exchange rate variations Order Case No. 66 of 2014 Page 20 of 79

21 Particulars Inprinciple Approval Business Plan MYT Petition Total (1 to 8) * MEGPTCL has submitted revised capital cost of commissioned sets pursuant to the statutory auditor s certificate on 9 June, The Petitioner has submitted the revised capital cost of the project pursuant to the statutory auditor s certificate on 9 June, For Set 1 there is an overall increase on account of impact of increase in taxes and duties which is partly set off by reduction of interest and finance charges. Similarly, for Set 2a & Set 2b there is a reduction of Rs. 25 crore and Rs. 2 crore, respectively in the interest and finance charges, preliminaries, pre-operative and other expenses. Further, the Petitioner has considered additional capitalisation for the unclaimed FERV for Set 2a and Set 2b by the EPC contractor which is expected to be crystallised in FY The Petitioner has not proposed any revision in the cost attributable to Set 3 in its submission of the revised capital cost for Set 1, Set 2a and Set 2b pursuant to the certification by the statutory auditor. Table 3-5: Revised capital cost of MEGPTCL pursuant to statutory auditor s certificate (Rs. Crore) S. No. Particulars Revised Estimate (pursuant to statutory auditor certificate) Set-1 Set-2a Set-2b 1 Preliminaries Transmission Lines Supply Order Service Order Non-EPC cost Additional initial spares Supply of additional items Substation Works Supply Order Service Order Non-EPC cost Metering for Akola-II and Koradi-III S/s Additional initial spares Supply of additional items Service for additional items Land for Substation Revised Taxes and Duties Overheads Project Management Consultancy services Order Case No. 66 of 2014 Page 21 of 79

22 (Rs. Crore) S. No. Particulars Revised Estimate (pursuant to statutory auditor certificate) Set-1 Set-2a Set-2b 5.2 Other Overheads Contingency Pre-operative expenses Deposit work for bays at Aurangabad substation + civil work 7 Financing and IDC Impact of foreign exchange rate variations 9 Total (1 to 8) Additional capitalisation proposed for unclaimed FERV on material import for Set 2a and Set 2b 11 Total Revised Capital Cost proposed (9+10) The key reasons for variations as cited by MEGPTCL in the Petition are as outlined below: Impact of FERV on material import Owing to the delay in implementation due to RoW issues, delayed clearances, land availability, availability of shut downs etc. certain material and equipment were imported after the scheduled completion dates of EPC contracts which led to the impact of FERV cost on MEGPTCL. Additional RoW Severe RoW cases in terms of number and nature involving long drawn litigations and resultant increase in land valuation has led to increased RoW compensation. Price Variation Due to delay in implementation, prices of input raw materials like steel, aluminium, copper etc. for the substation and transmission line equipment have increased and the same have been escalated at the applicable IEEMA/CACMAI indices for the differential period between scheduled completion and actual supply completion/estimated supply completion. Additional Spares The 765 kv system is being implemented for the first time in Maharashtra and moreover, the system is being implemented in remote locations. Further, the system is capable to carry almost 4500 MW of power and thus the availability of the system is crucial. To maintain the high availability of the transmission system and the fact that many equipment are being imported, timely availability of spares for these equipment is critical considering the long lead time involved in their delivery. Order Case No. 66 of 2014 Page 22 of 79

23 Land Land for Akola-II substation was initially to be purchased and handed over by MSETCL to MEGPTCL which is now being leased out to MEGPTCL, hence, the total capital cost of land is reduced. However, the corresponding increase in the lease rental for the same is factored as additional O&M in the ARR for the Control Period. Interest During Construction This has been impacted on account of delay in implementation of the project owing to delays in obtaining various statutory approvals, clearances, RoW issues, litigations etc. FERV Loan component The impact of FERV for the loan component has reduced in the MYT Petition from the Business Plan Petition since the exchange rate used in Business Plan Petition was Rs /USD and that used in the present MYT Petition is Rs /USD. However, there has been an overall FERV implication of Rs crore in the MYT Petition as compared to the in-principle approval. In addition, there is minor variation in the capital cost due to the other factors such as Quantity variation, EAR Insurance Policy charges, Idling Charges, Demurrage Charges, Additional Taxes and Duties, Additional Purchase Order/Service Order, Overheads etc Accordingly, the Petitioner has primarily attributed the increase in the capital cost to the reasons summarised above The Petitioner has submitted that it has segregated the entire project in different Sets (Set1, Set 2a, Set 2b and Set 3) in such a way that each Set can be put under commercial operation individually. The Petitioner has also segregated capital cost of each Set for the purpose of calculation of Tariff independently from the date of commercial operation of respective Set. The Petitioner also submitted that the audited capital cost of the elements which have been commissioned would be submitted shortly. In view of above, the Petitioner has requested to consider the submission of MYT Petition based on provisional capital cost The Petitioner further submitted that the Regulations 27.1 (a) and 38.4 of the MYT Regulations 2011 also provide for inclusion of projected expenditure in capital cost and approval of provisional Tariff based on anticipated date of Commercial Operation for Generating companies Further, the Petitioner also submitted that if Tariff determination takes place only after the commissioning of the project and subsequent to finalisation of accounts, it will lead to delay in recovery of ARR from the date of commissioning. This will result in recovery of ARR with carrying cost which will be an additional burden on the consumers on entire ARR instead of on just the differential amount between the provisional ARR and actual ARR at the time of True up The Petitioner has also submitted that provisional recovery of ARR based on prudently estimated capital cost would not only be in line with the provisions of Order Case No. 66 of 2014 Page 23 of 79

24 the MERC MYT Regulations, 2011 and reduce carrying cost burden on consumers but also help the Petitioner to adhere to its obligations with its lenders and maintain a healthy cash flow for sustained operations Accordingly, the Petitioner has requested the Commission to consider estimated capital cost for the purpose of approval of the MYT Petition. The Petitioner further stated that the final completed capital cost along with audited financial statements would be submitted within short time after date of commercial operation. Commission s observation on submission of capital cost: The Regulation 27.2 of the MERC MYT Regulations, 2011 states that the capital cost admitted by the Commission after prudence check shall form the basis for determination of Tariff and also defines that prudence check may include scrutiny of the reasonableness of the capital expenditure, financing plan, interest during construction, use of efficient technology, cost over-run and time over-run, and such other matters as may be considered appropriate by the Commission for determination of Tariff. Accordingly, the Commission has considered project cost approved in-principle as a basis for preliminary prudence check since the capital cost approved in the Business Plan Order was provisionally approved The Regulation 27.3 of the MERC MYT Regulations, 2011 states that the approved capital cost shall be considered for determination of Tariff and if sufficient justification is provided for any escalation in the project cost, the same may be considered by the Commission subject to the prudence check The Regulation 27.4 of the MERC MYT Regulations, 2011 states that the actual capital expenditure on CoD for the original scope of work based on audited accounts of the Company to original cost may be considered subject to the prudence check by the Commission Based on the provisions of the MERC MYT Regulations, 2011, the Commission had given a directive to the Petitioner to submit the MYT Petition along with audited statements and completed cost of the transmission project as on CoD of the project within 60 days from the date of issuance of the Business Plan Order The Commission noted that the Petitioner in its present submission has provided auditor s certificates dated 29 May, 2014 capturing the cost of Set 1 and Set 2a and dated 9 June, 2014 capturing the cost of Set 2b. The Set 3 is still pending completion and commissioning. Thus, the auditor certificate has been provided for part of the total project cost for the project being executed by the Petitioner The audited financial statements for the year on which the CoD has been achieved have also not been submitted. Therefore, the capital cost certified under the statutory auditor certificate can only be considered for approval upon verification of the same with complete audited statements for financial years upto CoD. Since Order Case No. 66 of 2014 Page 24 of 79

25 the completed audited statements for the year of CoD is yet to be submitted, final approval of capital cost for the transmission project subject to prudence check shall be carried out at a later date The Commission has taken the submissions of MEGPTCL on record. However, the Commission is of the view that at this stage, any attempt to approve the Capital Cost by carrying out the prudence check based on limited information will not serve any purpose as the some components of cost are likely to undergo change up to COD of the Project The Commission in its previous Orders on approval of Capital Cost has carried out the detailed prudence check by analysing the reasons for variation in Actual Capital Cost as on COD with respect to original estimated cost. MEGPTCL in its Petition has submitted that actual cost for commissioned sets and estimated the cost for the remaining set, though the project is yet to achieve COD. Therefore, the variation in capital cost till COD of the Project will also undergo change and it will be more appropriate to analyse the reasons for variation in actual Capital Cost with respect to original estimated capital cost Hence, the Commission is of the view any approval of capital cost at this stage will be based on limited prudence and based on certain assumptions, which will undergo change based on actual capital cost till COD of the Project. Hence, the Commission is considering the capital cost on provisional basis in this Order for the purpose of estimating the ARR so that the Petitioner may be allowed to recover some cost on account of commissioning of 2 Sets. The Commission shall approve the capital cost of the project after carrying out the prudence check of the capital cost while determining the final Tariff in accordance with the MERC MYT Regulations, 2011 based on audited capital cost on COD In view of the above, the Commission has undertaken the scrutiny of the revised capital cost provided by the Petitioner and the reasons for increase stated in the Petition. Based on the scrutiny, key observations of the Commission as regards the revised capital cost submitted by MEGPTCL have been elaborated below: 1. Cost escalation under EPC Contracts (a) Impact of FERV on material import component of capital cost MEGPTCL s submission: As submitted by the Petitioner, delay in forest clearance, RoW, legal matters, line crossing clearances, non-availability of land for substation and storage related infrastructure etc., has led to delay in completion period. Consequently, the import of off-shore material for transmission line such as disc insulators, OPGW, etc. and for substations such as shunt reactors, auto transformers, insulating oil, accessories, etc., was delayed. Order Case No. 66 of 2014 Page 25 of 79

26 Further, it is also submitted that there has been substantial increase in INR/USD exchange rate during the delayed period, i.e. after scheduled completion date till the actual delivery/anticipated completion. This has resulted in additional cost burden in respect of import of above mentioned materials during delayed period. Further, increase in INR/USD exchange rate has also resulted in extra burden in respect of payment of import duties. Accordingly, the EPC contractor has raised claim for the same. Further, it is submitted that as per the contract terms between MEGPTCL and its EPC contractor, 45% of invoice value is being retained by MEGPTCL in the form of retention and this retention amount could not be claimed by the contractor. Because of this, contractor had faced severe financial crunch. Consequently, the contractor was forced to prolong the payment to its overseas suppliers resulting in further loss on account of FERV. The cost implication due to impact of FERV on material import is to the tune of Rs crore. Commission s Observation: It is observed from the submission that one of the most important factors which has contributed to increase in the capital cost is the impact of foreign exchange rate variation on the material import. In the matter of FERV on material import, the provisions of Regulation 27 of the MERC MYT Regulations, 2011 may be referred as under: 27.1 Capital cost for a project shall include: (a) the expenditure incurred or projected to be incurred, including interest during construction and financing charges, any gain or loss on account of foreign exchange risk variation on the loan during construction up to the date of commercial operation of the project, as admitted by the Commission, after prudence check; 27.2 The capital cost admitted by the Commission after prudence check shall form the basis for determination of tariff: Provided that prudence check may include scrutiny of the reasonableness of the capital expenditure, financing plan, interest during construction, use of efficient technology, cost over-run and time over-run, and such other matters as may be considered appropriate by the Commission for determination of tariff The approved Capital Cost shall be considered for determination of tariff and if sufficient justification is provided for any escalation in the Project Cost, the same may be considered by the Commission subject to the prudence check: Order Case No. 66 of 2014 Page 26 of 79