MAHARASHTRA ELECTRICITY REGULATORY COMMISSION

Transcription

1 Before the MAHARASHTRA ELECTRICITY REGULATORY COMMISSION World Trade Centre, Centre No.1, 13th Floor, Cuffe Parade, Mumbai Website: Case No. 96 of 2009 IN THE MATTER OF Petition filed by The Tata Power Company Ltd. s Generation Business (TPC-G) for approval of Truing up for FY , Annual Performance Review for FY and Determination of Tariff for FY Shri V. P. Raja, Chairman Shri S. B. Kulkarni, Member Shri V. L. Sonavane, Member Date: September 8, 2010 O R D E R In accordance with MERC (Terms and Conditions of Tariff) Regulations, 2005 and upon directions from the Maharashtra Electricity Regulatory Commission (hereinafter referred as MERC or the Commission), The Tata Power Company Limited s Generation Business (TPC-G), submitted its application on affidavit for approval of truing up of Aggregate Revenue Requirement (ARR) for FY , Annual Performance Review (APR) for FY and tariff 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 TPC-G, all the suggestions and objections of the public, responses of TPC-G, issues raised during the Public Hearing, and all other relevant material, and after review of Annual Performance for FY , determines the tariff for the Generation Business of TPC-G for FY as under. MERC, Mumbai Page 1 of 167

2 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY Table of Contents 1 BACKGROUND AND BRIEF HISTORY Tariff Regulations MERC Order on ARR And Tariff Petition for FY and FY Review Petition on Tariff Order for FY MERC Order on MYT Petition For TPC-G for FY to FY _ MERC Order on APR Petition For TPC-G for FY and Determination of tariff for FY Review Petition on Order on APR for FY and determination of tariff for FY MERC Order on APR Petition for TPC-G for FY and Determination of tariff for FY Petition For Annual Performance Review for FY and Determination of tariff for FY Admission of Petitions and Public Process Organisation of the Order 13 2 OBJECTIONS RECEIVED, TPC s RESPONSE AND COMMISSION S RULING Inadequate time for filing Suggestions and Objections Incentivisation of Hydro Generation Capacity Allocation from TPC-G to RInfra-D Sharing of TPC-G capacity from FY onwards Recovery of Fixed Cost for Unit Fuel Expenses Operation & maintenance Expenses 22 3 TRUING UP OF ARR FOR FY Gross Generation Auxiliary Consumption Heat Rate Fuel price and calorific value Fuel Costs 33 MERC, Mumbai Page 2 of 167

3 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY O&M Expenses Capital expenditure and capitalisation Depreciation Interest Expenses Interest On Working capital Return on Equity (RoE) Non Tariff Income Income tax Revenue from sale of power Incentive on PLF and capacity index Incentive due to higher generation from hydro stations during peak hours _ Sharing of Gains and Losses for FY REVISED CAPITALISATION FOR FY Depreciation Interest Expenses Return on Equity Total Impact of revision in Capitalisation during FY IMPACT OF JUDGMENT OF APPELLATE TRIBUNAL FOR ELECTRICITY (ATE) AND PREVIOUS YEARS TRUING UP Background Administrative & general expenses towards tata brand equity Interest on working capital Depreciation Disallowances of entitlement on gains on account of O&M expenditure despite significant increase in uncontrollable expenses Summary of recoverable amount Impact of the ATE Judgment dated May 12, 2008 in Appeal No. 60 of Income from contingency reserve investment Reduction in Annual Fixed Charges for Unit Recovery of the amount 99 MERC, Mumbai Page 3 of 167

4 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY PERFORMANCE PARAMETERS Performance Parameters Generating Stations of TPC Unit-Wise Performance Parameters and Tariff ANALYSIS OF ENERGY AVAILABILITY, ENERGY CHARGES AND ANNUAL FIXED CHARGES FOR FY AND FY Energy availabiltiy Gross generation and Energy availability from TPC generating stations during FY Fuel Costs for FY Fuel Costs for FY O&M Expenses for FY O&M Expenses for FY Capital expenditure and Capitalisation Depreciation Interest Expenses Return on Equity (RoE) Interest on Working Capital for FY and FY Income Tax for FY and FY Facilities shared by 250 MW Unit 8 at Trombay Summary of Annual fixed charges for existing stations/units for FY and FY Station wise/unit wise fixed cost Tariff for Unit TARIFF OF TPC-G S GENERATING STATIONS Tariff for Thermal Power Generating Stations Tariff for Hydel Power Generating Stations Applicability of Tariff and Order 160 MERC, Mumbai Page 4 of 167

5 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY List of Abbreviations AFC Annual Fixed Charge APM APR A&G ARR AS (R ) ATE BEST BHEL Capex CAGR CERC COD CCPP CPI CPRI Cu.m CV DERC DPR Administered Pricing Mechanism Annual Performance Review Administrative and General Aggregate Revenue Requirement Accounting Standards (Revised) Appellate Tribunal for Electricity Brihanmumbai Electric Supply & Transport Undertaking Bharat Heavy Electricals Limited Capital Expenditure Compounded Annual Growth Rate Central Electricity Regulatory Commission Commercial Operation Date Combined Cycle Power Plant Consumer Price Index Central Power Research Institute Cubic meter Calorific Value Delhi Electricity Regulatory Commission Detailed Project Report EA 2003 Electricity Act, 2003 ESA Electricity (Supply) Act, 1948 FAC FERV FOB FBT Fuel Adjustment Cost Foreign Exchange Rate Variation Freight on Board Fringe Benefit Tax MERC, Mumbai Page 5 of 167

6 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY FY GAIL GFA GOM GTG HPCL IDBI IDC IDFC IOC IWC Financial Year Gas Authority of India Limited Gross Fixed Assets Government of Maharashtra Gas Turbine Generator Hindustan Petroleum Corporation Limited Industrial Development Bank of India Interest During Construction Infrastructure Development Finance Company Indian Oil Corporation Interest on Working Capital IT Act, 1961 Income Tax Act, 1961 kcal kcal/kwh KPI kw kwh KWDTA LA LCC LSHS MbPT MCM MOEF MoPNG kilo calories kilo calories per kilowatt hour Key Performance Indicators kilo Watt kilowatt hour Krishna Water Dispute Tribunal Award Licensed Area Load Control Centre Low Sulphur Heavy Stock Mumbai Port Trust Million Cubic Meter Ministry of Environment & Forests Ministry of Petroleum & Natural Gas MERC, Mumbai Page 6 of 167

7 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY MERC MMSCMD MPCB MSETCL MSLDC MSPGCL MT MU MW MYT OEM O&M ONGC PLF PLR PPA REL/RInfra RLNG RoE R&M RTC SBI STG TPC TPC-G Maharashtra Electricity Regulatory Commission Million Metric Standard Cubic Metre per Day Maharashtra Pollution Control Board Maharashtra State Electricity Transmission Company Limited Maharashtra State Load Despatch Centre Maharashtra State Power Generation Company Limited Metric Tonnes Million Units MegaWatt Multi Year Tariff Original Equipment Manufacturer Operations and Maintenance Oil and Natural Gas Corporation Limited Plant Load Factor Prime Lending Rate Power Purchase Agreement Reliance Energy Limited/Reliance Infrastructure Limited Regassified Liquefied Natural Gas Return on Equity Repair and Maintenance Round The Clock State Bank of India Steam Turbine Generator The Tata Power Company Limited The Tata Power Company Limited- Generation business MERC, Mumbai Page 7 of 167

8 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY TPTCL TVS VAT WDV WPI YTM The Tata Power Trading Company Limited Technical Validation Session Value Added Tax Written Down Value Wholesale Price Index Yield To Maturity MERC, Mumbai Page 8 of 167

9 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY BACKGROUND AND BRIEF HISTORY The Tata Power Company Limited (TPC) is a Company established in On April 1, 2000, the Tata Hydro-Electric Power Supply Company Limited (established in 1910) and The Andhra Valley Power Supply Company Limited (established in 1916), were merged into TPC to form one unified entity. 1.1 TARIFF REGULATIONS The Commission, in exercise of the powers conferred by the EA 2003, notified the Maharashtra Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations, 2005, (hereinafter referred as the MERC Tariff Regulations) on August 26, These Regulations superseded the MERC (Terms and Conditions of Tariff) Regulations, MERC ORDER ON ARR AND TARIFF PETITION FOR FY AND FY TPC submitted its Aggregate Revenue Requirement (ARR) and Tariff Petition for FY for its vertically integrated operations comprising of Generation, Transmission and Distribution Businesses in Case No. 12 of 2005 and 56 of 2005 on February 9, After two Technical Validations sessions, the Commission vide its letter dated May 4, 2006 directed TPC to submit its revised ARR and Tariff Petition for FY including a separate section on truing up of ARR for FY The Commission admitted the ARR Petition of TPC for FY (Case No. 12 of 2005) and ARR and Tariff Petition of TPC for FY (Case No. 56 of 2005) on May 18, The Commission issued the Order on the ARR Petition of TPC for FY and ARR and Tariff Petition of TPC for FY on October 3, REVIEW PETITION ON TARIFF ORDER FOR FY TPC filed a Review Petition (numbered as Case No. 47 of 2006) against the Commission s Order dated October 3, 2006, in the matter of TPC s ARR and Tariff Petition for FY and FY before the Commission. The Commission disposed of the Review Petition by issuing the Order dated March 22, TPC appealed (Appeal No.60 of 2007) against the Commission s Order on the Review Petition filed by TPC, before the Hon ble Appellate Tribunal for Electricity (ATE). The Appellate Tribunal issued its Judgment on TPC s Appeal (Appeal No. 60 of MERC, Mumbai Page 9 of 167

10 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY ) on May 12, The Commission also considered the impact of the said Judgment in its APR Order for TPC-G in Case No. 111 of MERC ORDER ON MYT PETITION FOR TPC-G FOR FY TO FY TPC submitted its ARR and Multi Year Tariff (MYT) Petition for the first Control Period from FY to FY for its Generation Business on January 3, 2007 numbered as Case No. 72 of The Commission issued the MYT Order for TPC-G for the first Control Period on April 2, 2007, which came into effect from April 1, 2007, and the tariffs were valid upto March 31, MERC ORDER ON APR PETITION FOR TPC-G FOR FY AND DETERMINATION OF TARIFF FOR FY TPC-G submitted its Petition for Annual Performance Review (APR) for FY and determination of tariff for FY for its Generation Business on November 30, 2007 numbered as Case No. 68 of The Commission had issued the Order dated April 2, 2008 in Case No. 68 of TPC-G appealed against the Commission s Order on the APR for FY and determination of ARR for FY , before the Hon ble Appellate Tribunal for Electricity (numbered as Appeal No. 137 of 2008). Along similar lines, TPC also appealed before the ATE against the Commission s APR Order for FY in respect of TPC s Transmission Business (TPC-T) and Distribution Business (TPC-D) (Appeal No. 138 of 2008 by TPC-T and Appeal No. 139 of 2008 by TPC-D). The ATE passed a combined Judgment in respect of these appeals on July 15, The impact of the same is considered in the current APR process subject to prudence check by the Commission, which has been discussed in detail in the APR Orders for FY of the respective businesses of TPC. 1.6 REVIEW PETITION ON ORDER ON APR FOR FY AND DETERMINATION OF TARIFF FOR FY TPC-G filed a review Petition numbered as Case No. 29 of 2008 against the Commission s ARR Order for FY in Case No. 68 of 2007 before the Commission. The Commission disposed of the review Petition vide its Order dated December 1, MERC, Mumbai Page 10 of 167

11 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY MERC ORDER ON APR PETITION FOR TPC-G FOR FY AND DETERMINATION OF TARIFF FOR FY TPC-G submitted its Petition for Annual Performance Review(APR) for FY and determination of tariff for FY for its Generation Business on November 28, 2008 numbered as Case No. 111 of The Commission issued the APR Order for TPC-G on May 28, 2009, which came into effect from June 1, TPC-G has appealed against the Commission s Order on the APR for FY and determination of tariff for FY , before the ATE (numbered as Appeal No. 191 of 2009). The ATE s decision on TPC-G s Appeal is awaited. 1.8 PETITION FOR ANNUAL PERFORMANCE REVIEW FOR FY AND DETERMINATION OF TARIFF FOR FY In accordance with Regulation 9.1 of the MERC Tariff Regulations, application for the determination of tariff is required to be made to the Commission not less than 120 days before the date from when the tariff is intended to be made effective. Further, the first proviso to Regulation 9.1 of the MERC Tariff Regulations provides that the date of receipt of application for the purpose of this Regulation shall be the date of intimation about receipt of a complete application in accordance with Regulation 8.4 above. In view of the separate process being undertaken by the Commission for formulation of the MERC MYT Regulations for the Control Period from FY to FY , the Commission directed TPC-G to submit the Petition for truing up for FY , APR for FY and determination of tariff for FY for its Generation Business, latest by December 31, TPC-G submitted its Petition for truing up for FY , APR for FY and determination of tariff for FY for its Generation Business on December 29, 2009, based on actual audited expenditure for FY , actual expenditure for first half of FY , i.e., from April to September 2009 and revised estimated expenses for October 2009 to March 2010, and projections for FY TPC-G, in its Petition, requested the Commission to: Accept the Petition for Annual Performance Review for FY and Tariff for FY for TPC-G in accordance with the guidelines outlined in MERC Orders passed in various matters relating to TPC-G and the principles contained in MERC Tariff Regulations; Include the impact of the ATE Judgment in respect of Appeal No. 137 of 2008 received on July 15, 2009 along with appropriate carrying cost as computed in the Petition. MERC, Mumbai Page 11 of 167

12 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY The Commission, vide its letter dated February 4, 2010, forwarded the preliminary data gaps and information required from TPC-G. TPC-G submitted its replies to preliminary data gaps and information requirement on February 12, The Commission scheduled a Technical Validation Session (TVS) on TPC-G s Petition for approval of APR for FY and Revenue Requirement for FY , on February 15, 2010 in the presence of Consumer Representatives authorised under Section 94(3) of the EA 2003 to represent the interest of consumers in the proceedings before the Commission. The list of individuals, who participated in the TVS, is provided at Appendix-1. During the TVS, the Commission directed TPC-G to provide additional information and clarifications on the issues raised during the TVS. The Commission also directed TPC-G to submit the draft Public Notice in English and Marathi in the format prescribed by the Commission. 1.9 ADMISSION OF PETITIONS AND PUBLIC PROCESS TPC-G submitted its responses to the queries raised during the TVS, on February 25, 2010, and the Commission admitted the APR Petition of TPC-G on March 18, In accordance with Section 64 of the EA 2003, the Commission directed TPC-G to publish its APR Petition in the prescribed abridged form and manner, to ensure public participation. The Commission also directed TPC-G to reply expeditiously to all the suggestions and objections received from stakeholders on its Petition. TPC-G issued the Public Notice in newspapers inviting suggestions and objections from stakeholders on its APR Petition. The Public Notice was published in The Times of India, Indian Express, Loksatta and Maharashtra Times newspapers on March 20, The copies of TPC-G's Petitions and its summary were made available for inspection/purchase to members of the public at TPC's offices and on TPC's website ( The copy of the Public Notice and the 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 proof of service on TPC. The Commission received written suggestions and objections expressing concerns on procedural issues, prices of imported coal, oil and fuel, allocation of generation capacity, income tax, etc., and a host of other issues. The Public Hearing was held in Mumbai on April 16, 2010 at 11:00 hours at 5 th Floor, Sunderbai Hall, Shri Nathibhai Thackersey Road, off Maharshi Karve Road, (Behind Income-Tax MERC, Mumbai Page 12 of 167

13 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY Office) Churchgate, Mumbai The list of objectors, who participated in the Public Hearing, is provided in Appendix- 2. The Commission has ensured that the due process, 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. Though a common Public Hearing was held for processing the APR Petitions for FY and determination of ARR and tariff for FY filed by TPC-G (numbered as Case No. 96 of 2009), TPC-T (numbered as Case No. 97 of 2009) and TPC-D (numbered as Case No. 98 of 2009), the Commission is issuing separate Orders on the three Petitions filed by TPC. This Order deals with the truing up for FY , Annual Performance Review of FY and determination of tariff of TPC-Generation Business for FY Various suggestions and objections that were raised on TPC-G s Petition after issuing the Public Notice both in writing as well as during the Public Hearing, along with TPC s response and the Commission s rulings have been detailed in Section 2 of this Order ORGANISATION OF THE ORDER This Order is organised in the following eight Sections: Section 1 of the Order provides a brief history of the 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. The various suggestions and objections have been summarised, followed by the response of TPC and the rulings of the Commission on each of the issues. Section 3 of the Order details the truing up of expenses and revenue of TPC-G for FY , including sharing of efficiency gains/losses due to controllable factors. Section 4 of the Order details out the impact of revised Capitalisation for FY Section 5 of the Order details the impact of the ATE Judgment dated July 15, 2009 in Appeal No. 137 of This Section also includes the truing of previous MERC, Mumbai Page 13 of 167

14 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY years on account of other factors like VAT refund, income from contingency reserve and final truing up of capex related expenses. Section 6 of the Order details the performance parameters as approved by the Commission in the MYT Order for the first Control Period, APR Order for FY , TPC-G s proposal for performance parameters and the Commission s approach on performance parameters during FY and FY Section 7 of the Order comprises the review of performance for FY and the Commission's analysis on various components of Energy Charges and Annual Fixed Charges of TPC-G s Stations/Units for FY Section 8 of the Order details the tariff design for TPC-G s Stations/Units and the approved Annual Fixed Charges and Energy Charges for FY MERC, Mumbai Page 14 of 167

15 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY OBJECTIONS RECEIVED, TPC s RESPONSE AND COMMISSION S RULING 2.1 INADEQUATE TIME FOR FILING SUGGESTIONS AND OBJECTIONS M/s Hotel and Restaurant Association Western India (HRAWI), M/s Retailers Association of India (RAI) and M/s Inorbit Malls India Pvt. Ltd (Inorbit) submitted that the Petition and the accompanying documents are extremely voluminous and contains complex technical data. The analysis of this data and its implications on the consumers requires substantial time and effort. They further submitted that the help of experts is necessary to analyse the details submitted in to decipher the true intent and meaning and purpose of the Petition. Various fundamental errors, faults and inconsistencies were present in the Petition and therefore, adequate time is required to investigate and examine the same. Hence, a period of 21 days is insufficient for filing Suggestions and Objections before the Commission and time period of 3 months should be provided. TPC-G s Response TPC submitted that a period of 3 months for filing suggestions/objections as asked by the certain stakeholders will result in further delay in issuing of the Tariff Order thereby resulting in a delay in applicability of the Tariff and consequently a significant change in the revenue that can be collected by the Utility. Hence, TPC requested the Commission to take forward the tariff determination process as per the past practice. Commission s Ruling As mentioned in Section 1 of the Order, TPC submitted its Petition for Annual Performance Review for FY and tariff determination for FY for its Generation Business on December 29, The Commission communicated the data gaps in the Petition and held a Technical Validation Session on TPC-G s Petition, in the presence of authorised Consumer Representatives. Upon submission of revised Petition by TPC-G incorporating the additional information and replies to queries raised by the Commission, the Petition was admitted for further public process on March 18, The Commission directed TPC-G to host the detailed Revised APR Petition and formats in MS Excel on its website for easy download by interested stakeholders. MERC, Mumbai Page 15 of 167

16 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY The Public Notice was published on March 20, 2010 in leading newspapers and the public hearing was scheduled on April 16, Thus, adequate time, as envisaged under the Regulations has been provided to stakeholders to submit their views/suggestions before the Public Hearing, and additional time of 7 days was also provided to file rejoinders. In any case, since tariff determination is a time bound exercise under Section 64 of the EA 2003, no further relaxation of time could be made for the provision of submission of suggestions and objections by the public in the interests of consumers as the same would have resulted in delay in issuing of the Tariff Order thereby resulting in a delay in applicability of the Tariff and consequently a significant change in the revenue that could be collected by the Utility, and hence an impact on the tariff levied on consumers. 2.2 INCENTIVISATION OF HYDRO GENERATION M/s Brihanmumbai Electric Supply & Transport Undertaking (BEST) submitted that TPC-G in its Petition have mentioned the hydel generation during peak period as 584 MU against 572 MU, i.e., 50% of total generation of 1144 MU and claimed incentive of Rs. 2 Crore to be recovered by TPC G. Further, the peak generation based on the APR Order is considered as generation between 0900 hours to 1200 hours and 1800 hours to 2200 hours, which is not matching with the peak hours of Mumbai Utilities to whom the majority of power from these Units is contracted. Hence, BEST suggested that for incentive computation, the Commission may consider the approved generation, i.e., 1375 MU. BEST also requested the Commission to consider the peak hours from 0900 hours to 1800 hours,taking into consideration the requirement of Mumbai Utilities with whom majority of the power from these hydro stations have been contracted. TPC-G s Response TPC-G submitted that the intention of the Commission was to incentivise Generating Companies to generate more power during peak periods. Actual hydro generation has been constrained due to monsoon and Krishna Water Dispute Tribunal Award (KWDTA) limits and it will be unfair to consider the approved generation as against actual generation for computation of incentive for higher hydel generation during peak period for computation of incentive. This incentive is aimed to achieve higher generation during peak period and is independent of the quantum of total generation. TPC-G submitted that in FY and FY , the actual generation has been much higher than approved generation. However, no such incentive was claimed by MERC, Mumbai Page 16 of 167

17 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY TPC-G for these years. TPC-G submitted that it agrees with the suggestion for consideration of peak hours in line with peak hours for Mumbai Utilities and has been proposing a different Peak and Off-Peak period as compared to rest of the State of Maharashtra. Commission s Ruling As regards the incentive on account of generation during peak hours, the Commission has deliberated on this issue in detail in Section 3 of the Order. Further, as regards the contention regarding the consideration of different peak periods for Mumbai as against the peak periods of the State of Maharashtra as a whole, the Commission has already dealt with this issue in the previous APR Order, and ruled that the peak period has to be defined on the basis of peak period of entire Maharashtra State, as the merit order despatch system has to be adopted for the entire Maharashtra State, and hence, the Commission retained the morning peak period of 09:00 to 12:00 hours and 18:00 to 22:00 hours as specified in earlier Tariff Orders. Hence, the Commission has not accepted the requests of BEST and TPC-G in this regard. 2.3 CAPACITY ALLOCATION FROM TPC-G TO RINFRA-D RInfra-D submitted that out of 500 MW capacity, which was being supplied to RInfra-D till FY , 100 MW has been tied up with BEST and balance 400 MW is being tied up with TPTCL, whereby TPC is converting a regulated generating capacity into a merchant capacity. RInfra-D stated that TPC-G is diverting a portion of it to TPC-D, which is a clear evidence of the ulterior motives of TPC-G of using its market dominance as a Generator to put the Distribution Business of RInfra at a disadvantageous position vis-à-vis its own Distribution arm (TPC-D), which is competing in Distribution and Retail Supply with RInfra-D. In the previous APR Petition, RInfra-D had requested the Commission to exercise its powers, inter alia, under Section 60 of the EA 2003 with regards to allocation of TPC-G s capacity in an equitable manner to eliminate the market dominance created by the Generation- Distribution nexus of TPC. If TPC-G withdraws supply of 500 MW to RInfra-D, RInfra-D would have to procure the balance power from external market at very high prices, causing its retail tariff to rise and become even more uncompetitive vis-à-vis the tariff of TPC-D, which is its competitor. In a situation of continuing shortage of power, the unilateral decision of TPC-G to withdraw 500 MW supply to RInfra-D reflects and clearly brings out the latent power of TPC for market dominance. RInfra- MERC, Mumbai Page 17 of 167

18 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY D stressed upon the fact that the ruling of the Supreme Court does not bar the Regulator (i.e., the Commission) to invoke provisions of market dominance under Section 60 of the EA 2003 and other provisions of the EA 2003, Tariff Policy, etc. Shri Shrikant Soman, a resident of Dahisar submitted that based on the Supreme Court Judgment, TPC as a Generator is not a Licensee and hence, is out of control of Regulatory Commission. TPC-G is free to sell its power anywhere in the country. TPC s senior officials have stated that they have not signed any Power Purchase Agreement (PPA) with RInfra for 500 MW capacity. Shri Soman added that the correspondence between the two organizations on the PPA issue, shows that RInfra in its letter dated April 13, 2009 offered to sign an unconditional PPA of 500 MW and TPC through its letter dated April 28, 2009 accepted RInfra s offer and also suggested to jointly approach the Supreme Court to record the settlement of pending case on allocation. He submitted that inspite of being committed to sign PPA and withdrawing the case in Supreme Court, TPC is now trying to take advantage of the shortage situation and is interested in siphoning the money from poor suburban consumers' pocket to their shareholders. Shri Soman also submitted that the consumers have contributed towards the fund collected by TPC in the name of Special Appropriation towards Project Cost to the extent of Rs. 534 Crore. The said amount is also acknowledged by the Commission in its Tariff Order. Therefore, it will set a wrong precedent if the Commission allows TPC to deprive energy to RInfra consumers who have funded the project. TPC-G s Response As regards the contentions raised regarding the 500 MW capacity, TPC-G denied that TPC's agreement with TPTCL amounted to converting a regulated generating capacity to a merchant capacity. TPC-G submitted that there is no concept of regulated generating capacity under the EA Section 10(2) of the EA 2003 clearly provides for de-regulation of generation activity by allowing the Generating Company to sell power to any person or licensee. TPC-G submitted that the PPA entered by and between TPC-G and BEST and TPTCL do not cause any adverse effect on competition. An agreement is treated as anti-competitive in vertical arrangements in the following circumstances under the Competition Act, 2002 namely: (i) Tie in arrangement including the agreement requiring a purchaser to buy some other goods as a condition to buy the principal good; (ii) Exclusive supply agreement which includes agreement that restrict a purchaser from buying goods other than those of the seller; MERC, Mumbai Page 18 of 167

19 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY (iii) (iv) (v) Exclusive distribution agreement including agreements to restrict the output, supply or market for any goods; Refusal to deal which restrict the person to whom goods are sold; Resale price maintenance. TPC submitted that the agreements executed by TPC-G with BEST and TPTCL do not fall under any of the instances and are therefore, not anti-competitive agreements and do not cause any adverse effect on competition. TPC also denied that it is using its dominant position as generator to deny 500 MW power to the consumers of RInfra-D. TPC submitted that it is not in a dominant position in electricity generation business. Section 60 of the EA 2003 provides that the Appropriate Commission may issue such direction as it considers appropriate to a Licensee or a Generating Company, if such Licensee or Generating Company enters into any agreement or abuses its dominant position or enters into a combination, which is likely to cause or causes an adverse effect on competition in electricity industry. TPC submitted that there is an extensive market available across India for bulk power. The capacity of 500 MW is a very small and insignificant portion of the entire bulk power market. Further, TPC-G submitted that it is not the responsibility of TPC-G to ensure that RInfra-D s business does not suffer loss or harm or that its consumers are not at a disadvantage. TPC-G also submitted that the fact that RInfra-D will have to buy expensive power from external market at very high prices cannot be a ground for not allowing TPC-G to discontinue supply to RInfra or sell its power to any other party. Commission s Ruling The issues related to capacity allocation of TPC-G stations has to be based on the PPAs signed by TPC-G with BEST. The issue of abuse of dominant position, etc does not come with in the ambit of present proceedings as the same are being conducted under Section 62 of EA As regards TPC s response that there is no concept of regulated generating capacity under the EA 2003 and Section 10(2) of the EA 2003 clearly provides for de-regulation of generation activity. The Commission would like to clarify that as per provisions of Electricity Act, 2003 no license is required for setting up generating station, however, if the tariff of generating station is determined under Section 62 of EA, 2003, then such generation capacity becomes regulated generating station to that extent. As regards the contentions of RInfra, the Commission is not inclined to allow the same at this stage in view of the issues raised MERC, Mumbai Page 19 of 167

20 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY in Case No. 1 of 2010 and Case No. 13 of 2010, which have been/are being dealt with separately. 2.4 SHARING OF TPC-G CAPACITY FROM FY ONWARDS BEST submitted that TPC-G, in its APR Petition, has mentioned that balance capacity available from April 1, 2010 to TPTCL is 400 MW. BEST requested the Commission to issue suitable instructions to TPC-G to adhere to the Commission s direction contained in the Order whereby the priority is to be given to the capacities contracted by the Distribution Licensees over any other transaction as continued availability of this contracted capacity has been factored in by BEST while working out the power purchase expenses in the ARR for FY TPC-G s Response TPC-G submitted that the directions issued under the Order dated January 19, 2010 are not relevant to the APR submission. TPC-G further submitted that they are bound by various directions and clarifications issued by the Commission and other statutory authorities. Commission s Ruling Since, the direction in relation to priority of contracted capacity issued by the Commission in Case No. 35 of 2009 dated January 19, 2010 applicable for contracted capacity from Unit 8 of Trombay Generating Station, is currently subjudice before the Hon ble Appellate Tribunal in Appeal No. 107 of 2010, the Commission is not inclined to give any findings or further directions at this stage in relation to the same RECOVERY OF FIXED COST FOR UNIT-7 RInfra-D and BEST submitted that fixed cost recovery for Unit-7 of TPC-G should be allowed in proportion to its actual Availability, since, TPC-G has stated that its Unit-7 at Trombay TPP had operated at 71.4% Availability Factor during FY TPC- G has cited certain technical problems during overhaul of Generator of Unit-7 STG, which has resulted in availability being lower than normative availability during FY TPC-G has requested the Commission to allow full recovery of Fixed Cost of Unit-7 despite its availability being lower than the norm of 80%. RInfra-D contended that lower availability of Unit-7 had already burdened end-consumers as MERC, Mumbai Page 20 of 167

21 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY Distribution Licensees had to procure costly power from the market to make up for the unavailability of Unit-7 and it would further burden consumers of Distribution Licensees if full Fixed Cost is allowed for Unit-7. Hence, RInfra- D suggested that Fixed Cost recovery for Unit-7 of TPC-G should be allowed in proportion to its actual availability. BEST suggested the Commission to consider the recovery of Fixed Charges based on MERC (Terms and Conditions of Tariff) Regulations, TPC-G s Response TPC-G submitted that in its APR Petition, it has provided valid justification for the lower availability of Unit-7 in FY , which was on account of winding failure of Steam Turbine Generator (STG), which is an aberration and an unlikely event of occurrence. Subsequent to the repairs of the same, Unit-7 performance has been restored to normal and availability during FY has been above 90%. In view of the same, TPC-G requested the Commission to consider full recovery of Fixed Costs for Unit-7 for FY Commission s Ruling As regards the recovery of fixed cost for Unit-7 on account of lower availability achieved as compared to the normative value of 80% during FY , the Commission has deliberated on this issue in detail in Section 3 of the Order. 2.6 FUEL EXPENSES Urja Prabodhan Kendra submitted that the actual fuel expenses for FY as claimed by TPC-G are very high as compared to the Commission's APR Order. It was also submitted that fuel oil cost is very high as compared to other fuel costs approved in the APR Petition for FY , whereas, the estimated figure for FY and projected for FY are on lower side. BEST submitted that TPC-G in its Petition has mentioned Energy Charge for Unit 8 as Rs. 2.46/kWh. However, in the Format, i.e., Form No. 2.1, the Energy Charge for Unit 8 is given as Rs. 2.8 /kwh. TPC-G s Response TPC-G submitted that Energy Charge of Rs.2.46/kWh for Unit 8 has been computed based on normative secondary fuel oil consumption, while the figure provided in MERC, Mumbai Page 21 of 167

22 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY Format, i.e., Form No. 2.1, is not on normative basis. For the purpose of computing the Energy Charge, the same should be based on the normative parameters. Commission s Ruling For FY , the Commission has considered the actual fuel prices for truing up of expenses and revenue, subject to normative performance parameters being achieved. The Commission has addressed the issue of fuel expenses in detail in Section 6 of the Order while analysing the various components of Energy Charges. As regards the fuel prices, the Commission obtained and analysed the month-wise actual fuel prices from November 2009 to March The Commission has accordingly, considered average fuel prices for the period from January 2010 to March 2010, while approving the energy charges for FY in accordance with the approach adopted in previous Orders. 2.7 OPERATION & MAINTENANCE EXPENSES Urja Prabodhan Kendra submitted that the increase in Operation & Maintenance (O&M) expenses from Rs. 353 Crore to Rs. 383 Crore appears to be on the higher side. TPC-G s Response TPC-G has not replied to the objection. Commission s Ruling Under the truing up process for FY , the Commission has considered the audited O&M expenses for FY , subject to prudence check, as elaborated in Section 3 of the Order. For FY and FY , the Commission has approved the O&M expenses based on suitable escalation factor on the base O&M expenses, as elaborated in Section 5 of the Order. MERC, Mumbai Page 22 of 167

23 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY TRUING UP OF AGGREGATE REVENUE REQUIREMENT FOR FY TPC-G, in its Petition, has sought approval for the final truing up of expenditure and revenue for FY based on actual expenditure and revenue as per Audited Accounts. TPC-G provided the comparison of actual expenditure against each head with the expenditure approved by the Commission along with the reasons for deviations and also proposed the sharing of the efficiency gain/loss for some of the heads of expenditure and revenue, as applicable. TPC-G also provided the details of the revenue earned during FY under various heads. Accordingly, the Commission in this Section has analysed all the elements of actual revenue and expenses for TPC-G for FY , and has carried out the truing up of expenses and revenue after prudence check. Further, for FY , the Commission has approved the sharing of gains and losses on account of controllable and uncontrollable factors between TPC-G and the Distribution Licensees, in accordance with Regulation 19 of the MERC Tariff Regulations, in this Section. 3.1 GROSS GENERATION The Commission, in its APR Order dated May 28, 2009 in Case No. 111 of 2008 approved gross generation from TPC-G s Trombay generating station as 9750 MU. However, the actual gross generation achieved by Trombay generating station during FY is 9832 MU, which is slightly higher than the gross generation approved by the Commission. TPC-G submitted that the actual hydel generation for FY was 1151 MU, which was lower than the quantum of 1375 MU approved by the Commission on account of constraints due to compliance with Krishna Water Tribunal Award (KWTA) norms. The overall generation from Trombay power station is marginally higher by around 0.8% than the approved levels. The generation from all the Units at Trombay Power Station, except Unit-7, was at higher level vis-à-vis the quantum approved by the Commission. TPC-G submitted that lower generation from Unit-7 was on account of extended outage. TPC-G submitted that during major overhaul of Unit-7 in 2004, gas turbine generator rotor inspection was carried out by Original Equipment Manufacturer (OEM) Siemens and findings indicated partially blocked ventilation holes. Siemens recommended full rewind of the generator rotor. An independent opinion was also taken from an ex-m/s Bharat Heavy Electrical Ltd. (BHEL) expert, who also recommended the rewinding at the earliest convenience. MERC, Mumbai Page 23 of 167

24 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY Based on above recommendation, gas turbine generator overhauls and rotor rewinding was planned during the major overhaul of July/August The outage activities were rescheduled for 70 days (from earlier schedule of 45 days) in view of additional work of balancing of generator rotor at BHEL (Hyderabad). The activities were planned in close co-ordination with Siemens' experts. Generator rotor experts were deputed at site for rotor rewinding work. Further, during the assembly work, installation of retaining ring caused a major technical problem, which resulted in extension of outage to 87 days. Further, post completion of the above outage and synchronisation of the Unit, abnormal bearing vibrations were observed in the STG Excitor, pre-dominantly at higher reactive loads on account of thermal imbalance. As a result, the Unit had to be operated on Open cycle mode for corrective actions. TPC- G submitted that the extended outage due to uncontrollable technical reasons during the overhaul has resulted in lower availability and lower generation in FY As regards the hydel generation, actual generation was lower during FY as compared to approved generation due to reduction in water availability and compliance with Krishna Water Tribunal Award (KWTA), which is beyond the control of TPC-G and hence, the Commission has considered the actual generation while truing-up the ARR for FY As regards thermal generation from Trombay generating station, the gross generation from all other units except Unit 7 was higher than the generation approved by the Commission. For Unit 7, the reduction in generation was due to extended outage for carrying out the repairs as per OEM recommendations. The Commission has therefore, accepted the actual gross generation of TPC-G generating stations for FY However, as the actual availability of Unit-7 during FY is 71.4% which is lower than the normative availability of 80% for recovery of full Annual Fixed Charges, the Commission has reduced the Annual Fixed Charges for Unit 7 on pro-rata basis as discussed in Section 4.9 of the Order. The summary of Unit-wise gross generation and availability approved by the Commission in APR Order for FY , actual gross generation during FY , and gross generation considered after truing up is shown in the Table below: Table: Summary of Gross Generation for FY (MU) Particulars FY Gross Generation APR Order Actuals Approved after truing up Hydel Stations Unit 4, Trombay Unit 5, Trombay Unit 6, Trombay MERC, Mumbai Page 24 of 167

25 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY Particulars FY Gross Generation APR Order Actuals Approved after truing up Unit 7, Trombay Total Thermal Total Gross Generation Table: Summary of Availability for FY Particulars FY Availability APR Order Actuals Approved after truing up Unit 4, Trombay 99% 97% 97% Unit 5, Trombay 99% 100% 100% Unit 6, Trombay 93% 90% 90% Unit 7, Trombay 82.60% 71% 80% 3.2 AUXILIARY CONSUMPTION TPC-G, in its Petition, submitted that auxiliary consumption of all its Stations/Units except hydel stations is lower than the auxiliary consumption approved in the APR Order. The weighted average auxiliary consumption for Trombay thermal station is 4.15%. As regards the higher auxiliary consumption of hydel stations, TPC-G submitted that there are certain auxiliaries at hydel stations that are required to be operated even if the generation is low thereby increasing the auxiliary consumption measured as percentage of the generation. Hence, the auxiliary consumption as a percentage of total consumption would seem to be higher in years of lower generation and submitted the following to support its claim: Years Gross Generation Aux. Consumption MU MU % FY , % FY , % TPC-G submitted that as can be seen from the Table there is a marginal difference in the auxiliary consumption (in terms of MU) for FY and FY , however, auxiliary consumption as % of generation is significantly lower on account of higher generation in FY Accordingly, TPC-G requested the Commission to approve the actual auxiliary consumption for hydel stations in FY The Commission is of the view that the reasons for higher auxiliary consumption in percentage terms given by TPC-G will also be applicable when the actual generation MERC, Mumbai Page 25 of 167

26 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY is on higher side, and the auxiliary consumption is reported lower, for which TPC-G has claimed and received performance incentive in the past. The Commission, while carrying out the final truing up of ARR for FY , had considered the difference between the normative auxiliary consumption and actual auxiliary consumption as efficiency gains. In case the reasons given by TPC-G are accepted for higher auxiliary consumption, then the same needs to be applied when generation has increased as compared to normative generation and mechanism of approving normative parameters and sharing of gains and losses for better/under performance will not have any sanctity. Therefore, the Commission has considered the normative auxiliary consumption for thermal and hydel stations approved for FY for truing up purposes, and has considered the difference between actual auxiliary consumption and normative auxiliary consumption as approved in the APR Order for computing the sharing of efficiency gain/loss for FY The summary of Unit-wise auxiliary consumption approved by the Commission in APR Order for FY , actual auxiliary consumption during FY , and auxiliary consumption considered for sharing of gains/losses is shown in the Table below: Table: Auxiliary Consumption for FY (%) Particulars FY Auxiliary APR Order Actuals Allowed after truing up Consumption Hydel Stations 0.50% 0.61% 0.50% Unit 4, Trombay 8.00% 7.65% 8.00% Unit 5, Trombay 5.50% 4.74% 5.50% Unit 6, Trombay 3.50% 3.08% 3.50% Unit 7, Trombay 2.75% 2.42% 2.75% 3.3 HEAT RATE The summary of the Heat rate approved by the Commission and actual Heat rate for FY for all Units of Trombay station is shown in the Table below: Table: Heat Rate for FY ( kcal / kwh) Heat Rate (kcal/kwh) APR Order Actuals Unit 4, Trombay Unit 5, Trombay Unit 6, Trombay Unit 7, Trombay TPC-G submitted that the overall station Heat rate is marginally higher by 1.24% than the approved levels. The Heat rate for Unit 4 and Unit 6 were within the levels MERC, Mumbai Page 26 of 167

27 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY approved by the Commission. However, in case of Unit 5 and Unit 7 the Heat rate was higher than those approved by the Commission. TPC-G submitted that in FY due to enhanced generation on coal, TPC-G managed fuel saving of Rs. 115 Crore and the same strategy of fuel saving has been followed for FY However, higher coal firing results in high exit gas temperatures, leading to increased boiler losses. Further TPC-G submitted that due to high volatility of Indonesian coal, frequent mill fires and explosions were experienced, which had to be controlled by reducing coal mill outlet temperatures from 63ᵒ C to 58ᵒ C. This was undertaken to ensure safe operations, and the restrictions on coal mill outlet temperatures contributed to higher boiler losses and hence, higher Heat rate of Unit 5. However, higher coal firing has enabled savings in fuel cost to the extent of Rs. 216 Crore in FY Further, TPC-G submitted that 500 MW Unit 5 at Trombay has been designed to fire Indian coal with moisture content of 8%, however, stringent environment norms necessitate firing of Indonesian coal with 0.1% sulphur and 2% ash as per directive of Maharashtra Pollution Control Board (MPCB). The Indonesian coal presently fired on Unit 5 meets the environmental requirements; however, it contains high moisture content in the range of 24% to 30%. TPC submitted that MERC Tariff Regulations Clause (b) iii & iv- prescribes a correction factor of 1.04 (+4%) for lignite as fuel with 30% moisture, to the normative gross station Heat rates. The proportionate correction for 24% moisture coal works out to 3.2%. In addition, TPC-G submitted that the Original Equipment Manufacturer (OEM) generally considers the life of coal fired plant as years after which, the Units are considered due for Renovation and Modernisation. The restoration of Units to a limited extent is attempted through each major overhaul. However, the overhaul recovers only some part of deterioration while overall deterioration in performance continues over the life of the Unit. This deterioration affects the Heat rate, which is a major performance criteria. TPC-G also submitted that the Commission in the MYT Order for TPC-G for FY to FY has considered a degradation of 0.2% per annum while deciding on the Heat rates of Units 4 and 5 at Trombay, which is in line with the degradation considered by NTPC as well as by the OEMs. However, the degradation factor needs to be applied to the entire service life of the Unit. The degradation of Heat rate for Unit 5 for 25 years of its service life at 0.2% deterioration per annum works out to 5.0% for FY The combined effect of both the above factors leads to a correction of +8.20% over the design Heat rate of Unit 5. TPC-G submitted that the appropriate Heat rate for Unit 5 for FY works out to be 2564 kcal/kwh. TPC-G also submitted that during the last outage in January 2008, copper MERC, Mumbai Page 27 of 167

28 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY deposits on HP turbine blades were removed by sandblasting, which has resulted in improvement in the Heat rate and therefore, the Heat rate for FY is 2551 kcal/kwh, which is about 0.6% better than the actual Heat rate for FY , i.e., 2567 kcal/kwh. As regards the Heat rate for Unit-7, TPC-G submitted that the approved Heat rate of 1971 kcal/kwh for FY is the same as that approved for FY However, the actual Heat rate achieved in FY is 2076 kcal/kwh. TPC-G submitted that during FY , Unit 7 was forced to run in open cycle mode for about 7 days due to vibration problems on Steam Turbine Generator (STG) Exciter bearings, thus contributing to higher Heat rate. TPC-G further submitted that despite the higher Heat rate in the Open Cycle mode, the Unit was operated, as the variable cost of power generation from the Unit was less than Rs.2.00/kWh due to usage of cheaper fuel. On February 21, 2009, STG tripped on 100% Stator Earth Fault and thereafter, the Unit was again synchronised on 18 th March 2009 after completion of the winding repairs. During the above period, the Unit operated in open cycle mode with Heat rate going as high as around 3300 kcal/kwh. Further, TPC-G submitted that in addition to the above factors, inadequate availability of Administered Pricing Mechanism (APM) gas has also resulted in the under utilisation of the Combined Cycle Power Plant (CCPP) and higher Heat rate. On an average, the availability of Gas is about 0.8 MMSCMD as against the requirement of about MMSCMD. Thus, the average load on the Unit is around MW as per the gas availability. TPC-G submitted that at times when the gas supplies are low, resorting to open cycle operation is the only option. All these uncontrollable conditions have led to higher Heat rates of the Unit. In this regard, TPC-G requested the Commission to approve the actual Heat rate for FY TPC-G further submitted that the Commission has prescribed a Heat rate norm of 1971 kcal/kwh considering only CCGT mode operation. However, there have been instances when the Units have been forced to run on Open Cycle mode also, on account of either technical reasons or inadequate gas availability. TPC-G requested the Commission to prescribe a dual Heat rate for Trombay Unit 7 so as to account for both modes of operation and also pointed out that Central Electricity Regulatory Commission (CERC) Regulations have also prescribed Heat rate for both modes of operation. Further, TPC-G proposed that the Heat rate norm for open cycle operation may be prescribed based on the Performance Test Curve for Unit 7 and subsequent to its commissioning in 1993 as presented below. MERC, Mumbai Page 28 of 167

29 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY As shown above in the Open Cycle performance curve, the Heat rate for 80% loading (96 MW) is around 3300 kcal/kwh. Further, the average availability of gas for Unit-7 from GAIL is about 0.8 MMSCMD based on the current production levels, whereas the quantum of gas required for full load operation is about 1 MMSCMD. Hence, the average operational load of Unit-7 assuming normal supply of gas is around 80% corresponding to 96 MW.. Table: SHR for Open Cycle and Combined Cycle Operation submitted by TPC-Gfor FY Generation During Open Cycle Operation No of Days Generation SHR Total Heat (MU) (kcal/kwh) (Mkcal) Oct ,466 Feb ,041 50,735 Mar ,208 1,20,532 Total ,260 1,93,734 Generation during Combined Cycle Operation and Overall Heat rate No of Days Generation SHR Total Heat (MU) (kcal/kwh) (MkCal) FY ,001 18,89,906 MERC, Mumbai Page 29 of 167

30 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY Total , ,076 20,83,640 TPC-G submitted that as shown in the above Tables, the Heat rate for the open cycle operation was 3,260 kcal/kwh and Heat rate for combined cycle operation was 2001 kcal/kwh during FY In light of the above, TPC-G requested the Commission to approve Heat rate of 3260 kcal/kwh for open cycle operations and 2001 kcal/kwh for the combined cycle operations during FY and prescribe separate Heat rates for Open Cycle and Closed Cycle operations as mentioned below for the subsequent years: Table: Proposed Heat Rate by TPC-G for Unit-7 Name of Capacity (MW) Break up Gas Generating Turbine and Station Steam Turbine Trombay Unit GT-120 MW x 1 + ST-60 MW x 1 Combined cycle Open cycle Heat Heat rate (kcal / rate (kcal / kwh) kwh) 2, The Commission has noted the reasons mentioned by TPC-G for variation in Heat rate of Unit 5 and Unit 7. As regards the Heat rate of Unit 5, the Commission appointed M/s Central Power Research Institute (CPRI), Bangalore to carry out a detailed study to assess the achievable performance parameters. On February 23, 2010, CPRI presented their findings to the Commission and submitted the draft report regarding overall findings pertaining to the performance parameters of Trombay Unit-5. During the presentation, the Commission noted that Unit Heat rate achieved by TPC-G in FY was 2551 kcal/kwh against the Achievable Heat rate value of 2581 kcal/kwh as determined by CPRI. The Commission asked CPRI to explain the anomaly in the Heat rate submitted by TPC-G in the APR Petition for FY and the Achievable Heat rate. In reply to the Commission s query, CPRI explained that they had conducted tests on the Unit-5 in December 2009 with full coal firing and had determined the achievable heat rate under the conditions at that point of time. The achievable value of Heat rate in FY in similar operating conditions were arrived at by regression. Further, the Commission also asked TPC-G to clarify the anomaly on the Heat rate. In response, TPC-G explained that in FY , TPC-G had conducted the capital overhaul of Unit-5, which TPC-G conducts in every 2 years, during which all jobs MERC, Mumbai Page 30 of 167

31 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY related to performance improvements are undertaken. On account of these jobs and due to removal of internal fouling, the Heat rate in FY showed significant improvement in the Heat rate. However, the condition deteriorates till next overhaul is carried out and the performance or Heat rate could deteriorate by approximately 15 kcal/kwh. TPC-G further submitted that while the Unit is in service, no improvement work can be undertaken and hence, the Heat rate trajectory shows a sawtooth waveform. The details of achievable Heat rate submitted by the CPRI considering the test Unit Heat rate (UHR) and considering the impact of improvement and overhauls in given in the following Table: Table: Achievable Heat Rate (kcal/kwh) submitted by CPRI Year UHR achieved by TPC-G Test UHR with Test UHR with degradation degradation + improvements + impact of overhauls Based on the CPRI recommendation, the Commission has approved the Heat rate of 2551 kcal/kwh for Unit 5 for FY As regards the Heat rate of Unit-7, the Commission is of the view that since the Commission had approved Unit-wise Heat rate in the MYT Order after considering the details of degradation factors provided by TPC-G, the same shall hold good. Further, if actual Heat rate of Unit-7 is allowed, then the purpose and objective of Multi Year Tariff mechanism of stipulating the norms at the beginning of the Control Period would be lost. Accordingly, the Commission does not agree with the MERC, Mumbai Page 31 of 167

32 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY contention of TPC-G to allow the Heat rate for Unit-7 on actual basis and is of the view that for the period of operation of Unit-7 in open cycle mode, the normative Heat rate as specified in the Tariff Regulations should be allowed. Accordingly, the Commission has considered the Heat rate for open cycle mode as stipulated in the Tariff Regulations for the period of operation of Unit-7 in open cycle mode and has accordingly considered the weighted average Heat rate of 2021 kcal/kwh for Unit 7 for FY In case the actual Heat rate of Unit-7 is approved, it would amount to passing on the entire loss to the consumers and burden them with higher cost on account of fuel that should not have been used, which would be contrary to the treatment for other Units, where the benefit of reduction in fuel consumption is being shared between TPC-G and the distribution licensees. Under the MYT mechanism, it is appropriate to share both gains and losses on account of stipulated controllable factors instead of just sharing the gains for better performance and passing on the entire losses due to underperformance to consumers. Therefore, for computing the efficiency gains, the Commission has considered the normative Heat rate as approved by the Commission for FY for Unit-4 and Unit-6. For computing the efficiency loss, the Commission has considered the Heat rate for Unit-5 and Unit-7 as approved by the Commission for FY in this Order. The summary of Unit-wise Heat rate approved in the APR Order, actual Heat rate for FY , and Heat rate approved after truing up is given in the following Table: Table: Heat rate ( Kcal / kwh) Particulars FY Allowed after Heat rate (Kcal/kWh) APR Order Actuals truing up Unit 4, Trombay Unit 5, Trombay Unit 6, Trombay Unit 7, Trombay FUEL PRICE AND CALORIFIC VALUE TPC-G submitted that the coal and oil prices showed a steep increasing trend in FY , as a result of which, the actual average oil cost for FY was Rs /MT as against the approved value of Rs /MT. Similarly, the actual MERC, Mumbai Page 32 of 167

33 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY average coal price for FY was Rs.4687/MT as against the approved value of Rs. 2915/MT. The variation in fuel price and calorific value of fuel during FY has been considered as part of Fuel Adjustment Cost (FAC) and has already been passed through to the consumers on a monthly basis under the FAC charge mechanism. For the purpose of truing up of fuel costs (variable cost of generation) for FY , the Commission has considered the actual fuel costs and calorific value as given in the Table below: Table: Fuel Parameters Particulars APR Order Actuals Allowed after truing up A. Fuel Price (Rs/MT) Gas Coal Fuel Oil B. Calorific Value (kcal/kg) Gas Coal Fuel Oil FUEL COSTS TPC- G, in its Petition has submitted that the total fuel cost for FY was Rs Crore as against the approved cost of Rs Crore. TPC-G submitted that the increased fuel cost is largely on account of the increased fuel prices for all the fuels viz., Coal, Gas and Oil during FY as compared to the approved fuel prices. Based on the Heat rate, fuel prices and fuel calorific value as discussed in above paragraphs, the total fuel costs for FY as summarised in the Table below: Table Fuel Costs (Rs Crore) Particular Actuals Normative Allowed after truing up Unit 4, Trombay Unit 5, Trombay Unit 6, Trombay Unit 7, Trombay Total Thermal MERC, Mumbai Page 33 of 167

34 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY O&M EXPENSES The Operation and Maintenance (O&M) expenditure comprises of employee related costs, Administrative and General (A&G) Expenses, and Repair and Maintenance (R&M) expenditure. TPC-G s submissions on each of these expenditure heads, and the Commission s ruling on the truing up of the O&M expenditure heads for FY are detailed below. The actual O&M Expenditure for FY was Rs Crore, which included expenses towards Fringe Benefit Tax (FBT) and Brand Equity and Brand Promotion as compared to Rs. 329 Crore approved in the APR Order of FY , after exclusion of the Brand Equity and Brand Promotion Expenditure. The various components of O&M Expenses are elaborated below: Employee Expenses TPC-G submitted that the total actual employee related expenses for FY was Rs Crore (including the fringe benefit tax) as against the actual expenditure of Rs Crore in FY TPC-G submitted that the employee expense for FY also includes the statutory provision on account of Accounting Standard [AS 15 (R)]. TPC-G submitted that AS 15 (R) relating to employee benefits has been made mandatory from April 1, The revised AS redefines employee benefits to include benefits arising out of formal plans, those provided under legislative requirements and those by informal practices (long service awards, retirement gifts, and hospitalisation benefits, etc.). The provision is computed based on an Actuarial Valuation. Accordingly, TPC-G submitted that such revised accounting standards have increased the employee expenses. The Commission asked TPC-G to submit the basis and assumptions for computing the capitalisation of employee expenses for FY and TPC-G submitted that the time sheet is sent by the concerned departments to accounts for the time spent by the members of the department on various projects. TPC-G submitted that the amount is booked every month by transferring to the respective projects. The Commission analysed the actual employee expenses for FY under various sub-heads vis-à-vis the actual expenses in FY The Commission asked TPC-G to provide the details of sub-head under which heads provisioning on account of AS 15 (R) have been shown. The Commission asked TPC-G to elaborate the reasons for the increased expenditure under the sub-heads of other allowance and staff welfare expenses and TPC-G submitted that increase in this head was on MERC, Mumbai Page 34 of 167

35 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY account of AS 15 (R). As TPC-G has provided the details of sub-heads for provisioning of AS 15 (R), for truing up, the Commission has considered the expenses related to provisioning of AS 15 (R) under the employee expenses. The Commission also asked TPC-G whether it has implemented any employee incentive scheme linked to performance parameters and asked TPC-G to submit the details of such schemes and expenses incurred. In response to the Commission s query, TPC -G submitted that the performance linked variable pay is part of the overall compensation package and is linked with individual performance, departmental performance and overall Organisational performance. Although, there may not be a direct link between the performance parameters of the businesses and the incentive given to the employees in terms of performance pay, however, the same is captured in the overall performance of the Company. TPC-G therefore, submitted that the employee incentive schemes are linked to the performance of the Company including that of Mumbai Licensed Area. The Commission also observed that TPC-G had allocated the employee expenses between Mumbai Licensed Area and Other Businesses incurred for FY under the head Head Office and Support System (HOSS) on the basis of the operating income as against the principle of allocation on the basis of number of employees of each basic area as submitted by TPC-G in the MYT and APR Petitions, which the Commission had also approved. The Commission also asked TPC-G to submit the allocation of HOSS expenses based on the principle adopted in previous years. TPC-G submitted that HOSS cost is first allocated between Mumbai Licensed Area and other to outside Mumbai LA on the basis of the operating incomes of the two areas. The portion of HOSS cost allocated to Mumbai Licensed Area on the above basis is then allocated to Generation, Transmission and Distribution Businesses on the basis as per the Table, which has been consistently followed every year. Items Employee Costs Repairs and Maintenance Administrative and General Expenses Interest and Finance Charges Assumptions with Rationale Allocated on the basis of numbers of employees of each Basic Area Allocated on the basis of respective opening balance of Gross Fixed Assets Allocated on the basis of total direct A&G expenses of each Basic Area before allocation Allocated on the basis of opening balance of Gross Fixed Assets MERC, Mumbai Page 35 of 167

36 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY Income Tax Non Tariff Income Allocated on the basis on return on Equity of Generation, Transmission and Distribution functions Non Tariff income primarily consists of income from Statutory Investments, rentals and sale of scrap, etc. While rentals and sales of scrap, etc. are related to the asset base and hence, allocated on the basis of asset base of the Basic Area, the income from statutory Investments in allocated in the proportion of the quantum of Contingency Reserves in the individual Business Areas. Considering the details of actual employee expenses and reasons submitted by TPC-G for increase in employee expenses, the Commission has allowed the employee expenses of Rs Crore for FY under the truing up exercise A & G Expenses TPC-G submitted that the actual A&G expenses for FY were Rs Crore (including brand equity) as against the actual A&G expenses of Rs Crore during FY TPC-G submitted that this increase is mainly due to: Fees paid to Dupont towards higher safety standards; Higher security cost after November 26, 2008; Higher ash disposal expenses; Provision for obsolete spares; Higher TBEM consultant fees paid to consultants. As regards the capitalisation of A&G expenses, TPC-G submitted that such A&G expenses, which relate to the Capex schemes (i.e., consultant s fees, travelling expenses, etc.), are directly debited to the scheme. Unlike employee costs, they are not routed through the Profit & Loss Statement. Hence, they do not separately appear as capitalised amount. TPC-G submitted that it has also considered the payment of Rs Crore towards Tata Brand Equity paid during FY for computing the A&G expenses. TPC-G submitted that it had appealed before the ATE against the Commission s stand on the disallowance of Brand Equity expenditure for FY and the decision of the ATE had restored the expenditure towards Brand Equity, which was disallowed by the Commission in previous Orders. In reply to the query asked by the Commission regarding details of instances where The Tata Group has promoted TPC-G through advertisements as part of the Group, which leads to brand building for TPC-G, TPC-G submitted that the Tata Group MERC, Mumbai Page 36 of 167

37 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY promotes Tata Power brand through various media that it employs for communication such as: Presence in its corporate collaterals like Tata Group Corporate Brochure, Corporate film, Tata Group Website and presentation CDs; Providing visibility to Tata Power initiatives in all the Group publications like Tata Review, Tata Sphere, theme based films targeted at external audience; Presence in joint exhibitions organised in India and abroad to showcase the Tata Group initiatives; Advertising support on common campaigns on social responsibility, energy conservation awareness, etc.; PR support by doing group stories including Tata Power from time to time; Providing support in vendor negotiation on media related services to get the advantage of economies of scale. In reply to the query asked by the Commission, TPC-G provided the details where The Tata Group has made available central services like recruitment, training courses and common procurement services. In accordance with the ATE s Judgment in the context of payments made towards Brand Equity, the Commission has considered the same under the truing up exercise subject to prudence check. On the basis of the submissions made by TPC, the Brand Equity for FY , FY and FY has been re-computed. The same has been elaborated in detail in Section 4 of this Order. Accordingly, the expenditure towards Brand Equity for FY has been considered as Rs Crore as against Rs Crore submitted by TPC-G. The Commission also asked TPC-G to clarify whether the sale from TPC-G to RInfra- D and BEST would amount to sale of products/services such as bulk commodity and whether the Annual Net Income for computation of Brand Equity will be eligible to invite a multiple of TPC-G submitted that as per guidelines BEBP agreement with Tata Sons, the discount factor of 0.75 multiple can be applied to bulk sales in respect of product sold by the Company. Such product sold in bulk should not bear the Tata name and logo. Similarly, in the case of traded goods, if they are sold under the name of the manufacturer and the Tata Name and logo is not used, then the discounting factor may be applied. Each Company applying the discount factor would need to give reasons for not bearing the Tata name and logo. TPC-G further submitted that as can be seen from the above guidelines, the case for applying the MERC, Mumbai Page 37 of 167

38 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY discount factor to bulk sales to BEST and RInfra does not arise as the Tata name and logo are not excluded whilst recording these sale transactions. The Commission observed that TPC-G has considered Rs 0.99 Crore towards Contribution/Donation under the A&G expenses for FY In response to the queries raised by the Commission, TPC has confirmed that such expenses are voluntary in nature. TPC further submitted that TPC as a whole has made a contribution to the extent of Rs 1.88 Crore and the same expense allocated for Mumbai Licensee Area is Rs 1.57 Crore. The same amount was further allocated to TPC-G, TPC-T and TPC-D as Rs 0.99 Crore, Rs 0.38 Crore and Rs 0.20 Crore, respectively. As regards to such expenses, the Commission has ruled in the APR Order for FY as under. The Commission is of the view that if the Company or the shareholders of the Company wish to contribute/donate towards charitable causes, the same should be contributed from the return earned out of the business, rather than passing on such costs to the Utility s consumers. Hence, for truing up purposes for FY , the Commission has not considered the expense of Rs 0.21 Crore towards donations as claimed by TPC-T. Hence, on similar lines, the Commission has not considered the expense of Rs 0.99 Crore towards Contributions/Donations as claimed by TPC-G. Further, as regards the engagement of DuPont to enhance the safety levels of TPC-G, the Commission has considered the same submitted by TPC-G, however the Commission directs TPC-G to submit the report within three months of issue of this Order and the Commission shall take a final view on the matter based on analysis of the submissions made. Considering the details of actual A&G expenses and reasons submitted by TPC-G for the same, the Commission has allowed the A&G expenses of Rs Crore for FY under the truing up exercise R&M Expenses TPC-G submitted that the actual R&M expenses for FY were Rs Crore as against the actual R&M expenses of Rs Crore during FY The Commission asked TPC-G to submit the reasons for such increase in R&M expenses in FY TPC-G submitted the following reasons for the increase: Materials procured for GTG overhauling for Unit-7 Rs Crore Overhauling of Unit-6 HP turbine and auxiliary services Rs Crore Dismantling of Decom Unit-4 coal conveyor structure Rs Crore MERC, Mumbai Page 38 of 167

39 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY Emergency lighting for safety reason Import of BI CAF-1230 (NACL O2) Rs Crore Rs Crore Considering the details of actual R&M expenses and reasons submitted by TPC-G for increase in R&M expenses, the Commission has allowed the R&M expenses of Rs Crore for FY under the truing up exercise Allocation of Load Control Centre to TPC-G TPC-G, in its Petition, submitted that The Tata Power Company, through its generating plants in Trombay, Khopoli, Bhira, and Bhivpuri (TPC G) supplies power to the Distribution Licensees in Mumbai namely BEST, RInfra-D and Tata Power s Distribution business (TPC-D). Further, it also operates transmission assets (TPC-T) to transmit the energy generated as well as power purchased from various parts of the country. TPC-T network is interconnected with MSETCL system and RInfra-T system at various points. TPC s Load Control Centre (LCC) is responsible for carrying out various activities for TPC-G, TPC-T and TPC-D. TPC submitted that the Commission, in its APR Order dated May 26, 2008 for TPC- T, had directed TPC to allocate the expenditure of LCC to the various business areas. Accordingly, TPC has allocated the expenditure of the LCC to the various Business Areas on the following basis: The Employee Expenses have been allocated to Generation, Transmission and Distribution businesses on the basis of the share of services provided by the TPC LCC personnel as worked out in the past; The expenses on account of R&M, A&G, Depreciation, Interest on Normative Loan, RoE and Interest on Working Capital, termed as Infrastructure Expenses, have been allocated on the basis of the data points monitored by the LDC for the three businesses. Thus, the percentage allocation of LCC s expenses to TPC-G, TPC-T and TPC-D as proposed by TPC for FY is summarised in the Table below: Table: Percentage allocation of LCC s expenses to TPC-G, TPC-T and TPC-D Expense Type Allocation to TPC-G Allocation to TPC-T Allocation to TPC-D Employee Expenses 30.63% 30.83% 38.53% MERC, Mumbai Page 39 of 167

40 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY Infrastructure Expenses 27.00% 68.00% 5.00% Further, in reply to the Commission's query regarding the detailed justification for allocation of LCC cost, TPC submitted that the percentages in case of Employee Expenses allocation have been computed on the basis of percentage of time spent by LCC personnel on the respective business of Generation, Transmission and Distribution. As regards percentage allocation of Infrastructure Expenses, TPC submitted that it has computed the same on the basis of share of number of analog and digital parameters being communicated to LCC for the respective business of Generation, Transmission and Distribution. As part of the reply, TPC also submitted detailed computations to justify the allocation pattern used for sharing the LCC cost. Based on the percentage allocation, the cost allocation of LCC s expenses to TPC-G, as proposed by TPC is summarised in the Table below: Table: Cost allocation of LCC to TPC-G for FY (Rs. Crore) Total TPC-G TPC-T TPC-D LCC Expenditure item Amount Allocation Allocation Allocation Total expenditure In accordance with the Commission s direction for providing the basis for accounting of LCC expenditure and the need for this expenditure, TPC submitted the detailed activities carried out LCC for TPC-G, TPC-T and TPC-D, as elaborated below. TPC submitted that the TPC's Load Control Centre is the first Load Control Centre of the Country established by The Tata Electric Companies (now Tata Power) in the year 1950 at Lonavala. With this, centralised power system control centre was brought into operation for then Tata-Railway system with requisite facilities. This LCC was shifted to Trombay in 1956 (known as Trombay LCC ) and since then, the LCC has been continuously upgraded to keep pace with changes in technology. Today, Trombay LCC is equipped with modern communication equipments and computer based realtime data acquisition and energy management system. Maharashtra State Load Despatch Centre (MSLDC) was established by erstwhile Maharashtra State Electricity Board (MSEB) in the year 1968 after Koyna Generating Complex was integrated with western transmission network. Initially, the Load Control activities were monitored from 220 KV receiving station at Kalwa. The Load Control was shifted to existing building in Since then MSLDC has been continuously upgraded to keep pace with changes in technology. MERC, Mumbai Page 40 of 167

41 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY TPC submitted that for all these years, while MSLDC overlooked the grid operations, monitoring and control of the Transmission System for the entire State, Tata Power s LDC was responsible for monitoring and control of the grid system supplying power to the city of Mumbai, which apart from various interconnection points between MSETCL and Tata Power, also included Tata Power s own Transmission system, RInfra s Transmission system and BEST s interconnection with Tata Power network. TPC submitted that subsequent to the setting up of the MSLDC, Tata Power s LCC continued to co-ordinate grid operations including co-ordination for Generation, Transmission and Distribution activities for all the three Utilities in Mumbai, viz., Tata Power, BEST and RInfra. Subsequent to the setting up of sub-ldc by MSLDC at Trombay, the current functionalities being executed by Tata Power s LCC are a combination of activities such as: (a) Schedule of Trombay and Hydro generation to be given to MSLDC; (b) TPC-T Grid management; (c) Distribution scheduling for TPC-T; (d) Management Information System (MIS) for Generation, Transmission and Distribution; (e) Co-ordinate with other control centre of RInfra and BEST as required by MSLDC and sub LDC. TPC submitted that the infrastructure at Tata Power s LCC is effectively utilised to Monitor, Control and Operate the various activities of Tata Power s operations in a co-ordinated fashion, and provided the details of the various functions executed by TPC s LCC. In addition to the above, TPC made a detailed submission in its Petition on the functions being performed by LCC pertaining to Coordination of Generation Planning and Control, System Control, Network Planning, Safety Monitoring and Commercial and Contractual Compliance. As regards the Commission's concern as highlighted in the previous APR Order, on the possibility of double-accounting of expenditure towards LCC of TPC by virtue of the existence of a State LDC (MSLDC), which performs similar functions as that of the LCC, TPC has demonstrated that the various functions carried out by LCC are not being carried out by SLDC and hence, there is no duplication of expenditure. MERC, Mumbai Page 41 of 167

42 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY Accordingly, the Commission has considered TPC's LCC for truing up purposes. Considering that the LCC costs are largely in the nature of O&M, the Commission has considered the entire cost as part of O&M expenses. For truing up purposes, the Commission has accepted the allocation of the LCC cost for its Generation, Transmission and Distribution businesses as submitted by TPC. Accordingly, in the current truing up exercise, the Commission has added the total share of TPC-G towards LCC costs of Rs 1.18 Crore for FY O&M Expenses Based on the approved Employee, A&G and R&M expenses for FY as mentioned in above paragraphs, the Commission has approved the O&M expenses for FY as shown in the Table below: Table: O&M Expenses (Rs Crore) Particulars FY O&M Expenses APR Order Actuals Allowed after truing up Employee Expenses A&G Expenses R&M Expenses LCC cost Total O&M expenses Reduced Donation (Rs 0.99 Crore) & Difference in Brand Equity (Rs Crore) 3.7 CAPITAL EXPENDITURE AND CAPITALISATION The Commission has examined the capital expenditure and actual capitalisation claimed by TPC-G as against the various capex schemes approved by the Commission. As against approved capitalisation of Rs Crore considered under its earlier APR Order dated May 28, 2009, actual capitalisation achieved by TPC-G during FY amounted to Rs Crore. The Commission has verified the actual capitalisation claimed by TPC-G as against capex schemes already approved by the Commission. The Commission s rationale for approving the capitalisation for FY in this Order is discussed below: a) The Commission has considered the actual capital expenditure and capitalisation of the DPR schemes after scrutinising the data provided by TPC-G for FY MERC, Mumbai Page 42 of 167

43 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY b) As regards non-dpr schemes, the Commission at this stage has not considered capitalisation of following Non-DPR Schemes during FY as some of these schemes are related to the DPR Schemes, which are yet to be approved by the Commission: (i) Malle-Nallah Diversion Scheme (ii) Masonry wall and barbed fencing (iii)barbed wire/ UCR wall around Mulshi lake (iv) Barbed fence survey/ Demarc-3 Hydros c) The Commission had issued a directive in respect of Non-DPR Schemes in the previous APR Order, restricting the capitalisation of such schemes to 20% of the capitalisation of DPR schemes during the year. The relevant extract of the Order is reproduced as under. In view of the above, as a general rule, the Commission has decided that the total capital expenditure and capitalisation on non-dpr schemes in any year should not exceed 20% of that for DPR schemes during that year. To achieve the purpose, the purported non-dpr schemes should be packaged into larger schemes by combining similar or related non-dpr schemes together and converted to DPR schemes, so that the inprinciple approval of the Commission can be sought in accordance with the guidelines specified by the Commission. (Emphasis added) d) The Commission observed that amount of capitalisation of Non-DPR Schemes as submitted by TPC-G exceeds 20% of amount of capitalisation of DPR Schemes during FY Hence, the Commission has considered capitalisation for Non-DPR Schemes only to the extent of 20% of the approved capitalisation of DPR Schemes during FY e) Further, TPC-G has also proposed de-capitalisation of Rs Crore during FY and has considered the impact on the capex related expenses. f) As regards the de-capitalisation, the Commission had asked TPC-G to submit the details regarding reasons for de-capitalisation and details of MERC, Mumbai Page 43 of 167

44 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY the assets that have been de-capitalised, loans pertaining to such assets and if any loan exists, then the details of write-off of such loans. TPC-G, in its response to the above query, submitted that the decapitalised assets are those assets, which are being used as facilities meant for outside the Mumbai licensed area. Further, TPC-G submitted that there are no loans outstanding against the assets decapitalised and accordingly the treatment for de-capitalisation is given for equity portion only. TPC-G also submitted that the net value of the assets de-capitalised is reduced from the equity after allocation of the amount of decapitalisation to Generation, Transmission and Distribution Business on the basis of the Opening GFAs in these areas for FY g) As regards capitalisation of captive coal berth of Trombay disallowed by the Commission for FY due to the non-accordance of inprinciple approval during last APR Order, TPC-G in its Petition mentioned that it has submitted the details and benefits that have been accrued due to captive coal berth of Trombay and requested the Commission to grant approval to the same along with additional interest of Rs Crore. h) The Commission has considered capitalisation of captive coal berth of Trombay during FY as it has been given in-principle approval by the Commission. Since captive coal berth of Trombay was not capitalised during FY as it was not given in-principle approval during FY , the Commission has not considered the additional interest of Rs Crore as claimed by TPC-G in the Petition, as the Commission has accorded the approval of this scheme in FY and approved capitalisation to be spread in FY and FY Accordingly, for truing up for FY , the Commission has approved the capitalisation of Rs Crore. The break-up of DPR and Non-DPR Schemes as approved by the Commission during FY is tabulated below: Table: Break-up of DPR and Non-DPR Schemes as approved by the Commission ( Rs Crore) Particulars FY MERC, Mumbai Page 44 of 167

45 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY TPC-G Approved Total Capitalisation after capping Non-DPR Schemes to 20% Total Schemes approved after capping DPR Schemes Non-DPR 20% of DPR Schemes DEPRECIATION The Commission, in its earlier APR Order dated May 28, 2009, in Case No. 111 of 2008 had permitted depreciation expenditure of Rs Crore for FY , which amounts to 1.87% of opening level of Gross Fixed Assets (GFA) of TPC-G for FY , which was considered as Rs Crore. The depreciation rates were considered as prescribed under the MERC Tariff Regulations, TPC-G, in its APR Petition, submitted that the actual depreciation in FY was Rs Crore. TPC-G further submitted that the depreciation for FY has been computed on opening GFA as well as on the assets added during FY TPC-G submitted that it had appealed before the ATE against the Commission s stand on the issue of depreciation on assets added during the year, on which ATE has ruled that proportionate depreciation on the assets that have been put to use should be allowed. The Commission has considered the depreciation on account of assets added during the year in accordance with the ATE Judgment in Appeal No. 137, 138, and 139 of The ATE, in its Judgment in Appeal No. 137, 138, and 139 of 2008, has ruled as under: 31. In view of the provisions of the Tariff Regulations the Companies Act and the Accounting Standard-6, we find full justification and rationale in the contention of the appellant that proportionate depreciation has to be allowed even for part of the year when the assets have been put to use. The asset once put to use will be exposed to wear and tear which will not wait to depreciate till the start of the new financial year. We, therefore, allow the appeal in this view of the matter also. The Commission obtained the details of the asset addition during the year along with the date of capitalisation and working for depreciation on the asset addition on prorata basis. Upon scrutinising the data provided by TPC-G, the Commission observed that TPC-G has erroneously computed the depreciation for the entire month of capitalisation of the asset instead of the date of capitalisation. The Commission MERC, Mumbai Page 45 of 167

46 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY thereupon computed the depreciation on the basis of actual number of days the assets have been put to use during FY Further, TPC-G in its additional submission confirmed that depreciation has not been claimed beyond 90% of the asset value in accordance with the MERC Tariff Regulations. The depreciation expenditure approved by the Commission in the APR Order, depreciation claimed by TPC-G, and depreciation expenditure allowed after truing up for FY on above mentioned basis have been summarised in the following Table: Table: Depreciation (Rs. Crore) Particulars APR Order Apr-Mar Allowed after (Audited) truing up Opening GFA Asset Addition During the Year Depreciation on Opening GFA Depreciation on Asset Addition Total Depreciation INTEREST EXPENSES The Commission, in its APR Order dated May 28, 2009 in Case No. 111 of 2008, had approved interest expenditure of Rs Crore, after considering the interest expenditure on normative debt and actual loan from Infrastructure Development Finance Company Limited (IDFC) corresponding to capitalised assets only. The Commission, in its earlier Tariff Order dated October 3, 2006 (Case No. 12 and 56 of 2005), had considered normative interest expenditure on loans corresponding to capitalised assets at interest rate of 10% p.a. for assets put to use during FY and FY and loan repayment period of 10 years. Further, for assets capitalised during FY and FY , the Commission had considered the interest rate of 8.90% in accordance with the IDFC loan terms. TPC has estimated the interest expenses for FY under the following heads: Interest on long-term debt; Interest and Finance Charges. TPC-G submitted that interest on long-term debt for FY has been computed based on interest on normative loans and actual loans for previous years and normative and actual loan for 70% of the expenditure capitalised in FY MERC, Mumbai Page 46 of 167

47 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY TPC-G further submitted that it has raised a loan of Rs. 450 Crore from IDFC and Rs. 400 Crore from Industrial Development Bank of India Limited (IDBI) to fund its current capital expenditure. TPC-G has considered the financing of the capitalisation in FY from actual loans availed from IDFC and IDBI as well as normative loan to the extent of 70% of the capitalisation. The summary of the IDFC and IDBI loan utilised for TPC-T, TPC-D and existing Units of TPC-G, as submitted by TPC, is shown in the Table below: Table: Summary of Financing of Capitalisation TPC-G also submitted that it has considered the IDBI and IDFC loan to the extent of Trombay Unit No. 8 capacity utilised for Licenced Area. Further, TPC-G submitted that the variation in the interest expenditure vis-à-vis the approved interest expenditure, was mainly on account of the following reasons: a) Difference in capitalisation considered by the Commission for FY in Order dated April 2, 2008; b) The approved capitalisation for FY vis-á-vis the actual capitalisation in the respective years. A. Utilisation of Actual loan of IDFC and IDBI Loan and Normative Loan for financing of capitalisation of Existing Units of TPC-G 1. IDBI Loan: TPC submitted that a loan of Rs. 400 Crore has been raised from IDBI for funding its capital expenditure for its Generation, Transmission and Distribution Business in the Mumbai region. The disbursement schedule of IDBI loan-1 as submitted by TPC is shown in the Table below: MERC, Mumbai Page 47 of 167

48 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY Table: Disbursement of IDBI Loan Quantum disbursement Month of disbursement Rs. Crore (%) Mar Aug Oct Mar of Net rate of interest Total Further, TPC in its Petition has submitted the utilisation of IDBI loan-1 for TPC-D, TPC-T and recently commissioned Unit-8 and for existing Units of TPC-G, summarised in the Table as under: Table: Financing of capitalisation through IDBI Loan-1 (Rs. Crore) Sr. No 1 Particulars Unit-8 Balance availabl Total 250 MW LA- 150 MW e for LA Capex Financing of capitalisation (of FY ) in LA other than Unit-8 Genera tion Transmi ssion Distribut ion For capitalisation up to 31 st March Expected capitalisation during FY Total As regards the loan availed from IDBI, the Commission in its APR Order in Case No. 111 of 2008 has stipulated as under: As observed from the above submissions of TPC-G, against the sanctioned amount of loan of Rs. 400 crore from IDBI, TPC-G has considered a loan drawal of Rs crore for Unit-8 alone. Effectively, the other schemes have been funded by normative loan, since only Rs. 400 crore has been sanctioned by IDBI till date. Hence, the Commission has considered the utilisation of actual loan availed from IDBI during FY for funding the capex requirement of Unit-8... MERC, Mumbai Page 48 of 167

49 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY The loan availed from various sources for financing of Unit-8 of TPC-G, as submitted in TPC-G s Petition in Case No. 35 of 2009 and as reported on Page No. 43 in the Order dated January 19, 2009 in the matter of approval of Capital Cost and determination of Tariff for Trombay Unit No. 8 (Case No. 35 of 2009), is tabulated as under: Table: Financing of Unit-8 as approved by the Commission (Rs. Crore) Sr No. Source As claimed by TPC (Rs. Crore) Interest Up to Additio Rate (%) COD nal Capitali sation Total As Approved by the Commission (Rs. Crore) Interes Total t Rate (%) Up to CO D Addition al Capitalis ation 1 IDFC Floating Floatin g IDBI Tranche % % IDBI Tranche % % IDBI 4 Tranche % % IDBI Tranche % % 6 IDBI Tranche % Total Debt As seen from the above Table, TPC had submitted the actual tranche-wise loans availed from IDBI for Unit-8, which sums up to Rs. 398 Crore (i.e., Sr. No ), which effectively means that entire IDBI loan-1 of Rs. 398 Crore (i.e., loan pertaining to Tranche 1 to 4) has been utilised for financing of Unit-8, while in the previous Table TPC-G has submitted that it has utilised Rs. 239 Crore for the financing of Unit-8 and remaining Rs. 159 Crore has been utilised for the financing of Generation, Transmission and Distribution business. Since, TPC-G has already utilised the loan of Rs. 398 Crore for Unit-8, hence, effectively, no actual loan pertaining to IDBI loan-1 remains to be utilised for any other purpose. MERC, Mumbai Page 49 of 167

50 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY Accordingly, the Commission asked TPC to justify the allocation of Rs. 159 Crore of IDBI loan-1 towards financing capital expenditure of Generation, Transmission and Distribution business during FY In reply to the Commission s query regarding allocation of IDBI loan, TPC submitted that Unit-8 had two portions, viz., (i) 150 MW capacity for Licenced Area and (ii) 100 MW capacity to be sold through TPTCL i.e., Non Licenced Area. TPC-G further submitted that the loans of IDBI have been taken for Licenced Area business and quoted the extracts of the loan agreement as under: TPC-G submitted that as observed from the above extract, the loan has been given to the Mumbai Licensed Area business and Unit 8 has two portions, one of which is 150 MW capacity for Mumbai Licensed Area. Accordingly, TPC submitted that it is necessary to carve out the loan applicable for Mumbai Licensed Area which is done in the proportion of the Licensed Area capacity (150 MW) to Total Capacity (250 MW), which works out to Rs. 239 Crore. Since the IDBI loan of Rs. 398 Crore is for the Licensed Area, it leaves a balance of Rs. 159 Crore for other capitalisation i.e., other than the portion of Unit 8 in the Licensed Area. Considering the submission made by TPC in Case 35 of 2009 and the subsequent Order in the same matter dated January 19, 2010 (as given in the above table), it is observed that the entire IDBI Loan-1of Rs 398 Crore has been utilised for financing of TPC-G Unit-8. Effectively, the other schemes have been funded by normative loan, since only Rs. 398 Crore has been disbursed by IDBI till date. However, the Commission in its Order dated January 19, 2010, has approved a capitalisation of Rs 377 Crore (sum of approved loan of IDBI Tranche 1, 2 &3) being funded through IDBI loan-1. Hence, the Commission has considered the utilisation of Rs 377 Crore of actual loan availed from IDBI during FY for funding the capex requirement of Unit-8 and Rs 21 Crore (Rs 398 Crore - Rs 377 Crore) of actual loan for MERC, Mumbai Page 50 of 167

51 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY capitalisation of License Area of TPC during FY The same has been allocated among TPC-G, TPC-T and TPC-D in the ratio of capitalisation during the financial year. The summary of the loan amount pertaining to IDBI loan as submitted by TPC and approved by the Commission is shown in the Table below: Table: Financing of capitalisation through IDBI Loan as approved by the Commission (Rs. Crore) Particulars TPC-G TPC-T TPC-D Total TPC-G Commission IDFC Loan: The summary of the actual loans availed from IDFC and utilised for TPC-D, TPC-T, Trombay Unit No. 8 and existing Units of TPG-G as submitted by TPC is shown in the Tables below: Table: Position after financing through IDFC Loan The Commission observed that TPC has availed the total loan of Rs. 450 Crore from IDFC Ltd. in accordance with the terms and conditions of the Loan Agreement dated September 28, The Commission in its Tariff Order for Trombay No. Unit 8, dated January 19, 2010, in Case No. 35 of 2009 had approved the loan amount of Rs. MERC, Mumbai Page 51 of 167

52 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY Crore from IDFC for the financing of Trombay Unit No. 8 of TPC-G. Effectively, the other schemes that have been funded by IDFC loan, amounts to Rs Crore since only Rs. 450 Crore has been disbursed by IDFC till date. The Commission has considered this available amount of Rs Crore for funding the capitalisation of FY and FY for TPC-T, TPC-D and existing Units of TPC-G, in the ratio of the actual capitalisation during those years. Accordingly, for utilising the remaining IDFC loan of Rs Crore, the Commission has considered the financing of Rs Crore in FY for TPC- T, TPC-D and existing Units of TPC-G, in accordance with values approved in previous APR Order dated May 28, 2009, in Case No. 111 of Further, the remaining IDFC loan left after utilisation of Rs Crore amounts to Rs Crore for existing stations of Generation, Transmission and Distribution Business of TPC, which the Commission has allocated in the ratio of the actual capitalisation for these businesses during FY The summary of the IDFC loan utilised for TPC-T, TPC-D, Trombay Unit No.8 and existing Units of TPC-G is shown in the Table below: Table: IDFC Loan as approved by the Commission (Rs. Crore) IDFC Loan (Rs. 450 Crore) Year Unit 8 * TPC-G TPC-T TPC-D Total =2+3+4 Approved in APR FY Order for FY Revised Approved Approved in APR FY Order for FY Revised Approved Total *approved in Tariff Order for Unit-8 in Case No. 35 of Normative Loan: TPC-G has proposed the financing of the actual capitalisation of Rs Crore in the debt-equity ratio of 70:30. Further, after utilising the actual loan pertaining to IDBI and IDFC, TPC-G has considered the remaining amount as normative loan. MERC, Mumbai Page 52 of 167

53 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY As regards the funding of the capitalisation during FY , the Commission has also considered the debt-equity ratio of 70:30 as submitted by TPC. Further, after utilising the actual loan pertaining to IDBI and IDFC as approved in this Order, the Commission has considered the remaining amount as normative loan. The summary of the normative loan as submitted by TPC-G and as approved by the Commission in this Order is shown in the Table below: Table: Normative Loan as approved by the Commission (Rs. Crore) Particulars Row No. FY FY TPC-G Approved TPC-G Approved Capitalisation % of the Capitalisation 2=1*70% IDBI Loan IDFC Loan Normative Loan Total Loan 6= B. Loan Repayment Schedule: 1. IDBI and IDFC Loan: For projecting the interest expenses towards IDBI and IDFC loans, TPC-G has considered the following loan repayment schedule in accordance with the terms of the loan agreement: IDFC Loan: o Tenor: 3 years moratorium period + 9 years; o Repayment: 35 quarterly instalments of Rs Crore and 36 th instalment of Rs Crore. IDBI Loan: o Tenor: 3 years moratorium period + 10 years; o Repayment: 5% of the loan amount would be repaid every year for the first nine years and balance in the 10 th year. MERC, Mumbai Page 53 of 167

54 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY As regards, the IDBI and IDFC loan agreements, the Commission has observed that repayment schedule is back-ended (i.e., more than 50% of the loan availed has been proposed to be repaid in the 10 th year) as shown in the Table below: Table: Repayment of IDFC and IDBI loans Particulars Unit IDFC IDBI Loan Availed Rs. Crore Repayment in the last year Rs. Crore Repayment as % of Loan Availed % 57% 55% In reply to the Commission s query regarding the reasons for entering into back ended repayment schedule, TPC submitted that the repayment of loans taken for Mumbai License Area have been scheduled in such a way that they mirror the depreciation provided by the Commission, which help in matching the cash outflow from repayment with inflow from reimbursement for depreciation. TPC submitted that the average depreciation as provided in the MERC Tariff Regulations, 2005, amounts to 3.6% of the total capitalisation. Hence to mirror this, the repayments have been scheduled at 5% each year (this amount will be almost equal to depreciation provided, considering a Debt: Equity ratio of 70:30). TPC further submitted that if this repayment rate is continued, it would imply a repayment period of about 20 years however, there is bullet repayment to the extent of 55-57% in 10 th year. Hence, the loan in fact is front ended to this extent. Further, in reply to Commission s query to TPC regarding the alternative repayment schedule for optimising the interest cost and clarification regarding possibility of negotiating the repayment schedule for optimising the interest cost, TPC submitted that if the depreciation rate as allowed by the Commission is increased to a higher rate, negotiations can be made accordingly to modify the repayment schedule to optimise the interest cost. As regards TPC s request for higher depreciation rate to enable it to negotiate modification of repayment schedule for optimising interest cost, depreciation has to be allowed in accordance with the rates stipulated in the MERC Tariff Regulations. The Commission has also observed that TPC has started availing the actual loans from FY onwards only, hence, the depreciation allowed on the existing assets would act as cushion available to TPC, which may be utilised for negotiating the repayment schedule for optimising the interest cost. Accordingly, for computing the interest expenses liability for FY towards IDFC and IDBI loans, the Commission has considered the repayment schedule as submitted by TPC. MERC, Mumbai Page 54 of 167

55 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY Normative Loan: TPC submitted that it has considered the repayment of the Normative Loans equal to the Depreciation, in accordance with the MERC Tariff Regulations and accordingly repayment of 5% of the normative loan amount has been considered in accordance with the methodology adopted by the Commission in its Tariff Order dated October 3, 2006 in Case No. 12 of 2005 and 56 of In accordance with the proviso under Regulation 32.2 of the MERC Tariff Regulations, normative loan repayment schedule for each year shall be equal to amount of depreciation for fixed assets to which such loan relates. Accordingly, the Commission has considered loan repayment schedule of 20 years for the normative loan approved during FY Previous Year's Loans: The Commission has considered the Normative Loans corresponding to capitalised assets only and a repayment schedule of 10 years for the assets put to use during FY and FY C. Interest Rate and Expenses: For projecting the interest expenses towards IDBI and IDFC loans, TPC-G submitted that it has availed loan from IDBI and IDFC with following terms: IDFC Loan: Interest Rate: 5 year G-Sec rate +1.45% p.a., subject to minimum of 8.90%. IDBI Loan: Interest Rate: BPLR (-) 2.76% p.a. payable monthly. The interest rate to be fixed on each date of disbursement. Accordingly, TPC submitted that the interest rate is liable to vary over a period of time. Through a letter dated September 29, 2008, IDFC has sought to reset the interest rate to 13% from September 29, 2008 for a period of one year. Accordingly, TPC has considered an average rate of 10.95% (i.e., average of 8.9% and 13%) for FY MERC, Mumbai Page 55 of 167

56 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY As regards the interest rate for IDBI loan, TPC submitted the details of disbursement in FY towards IDBI loan as shown in the Table below: Table: Repayment of IDBI loan (Rs. Crore) Month of Disbursement Quantum of Disbursement Net Interest Rate End March % August % October % March % Total % Accordingly, TPC submitted that it has considered an average rate of 11.50% for working out the interest liability on IDBI loan in FY , which has been accepted by the Commission. As regards the change in IDFC loan, the Commission has observed that in accordance with IDFC s letter dated October 6, 2009 for change in interest rate as submitted by TPC, IDFC has reset the spread from 1.45% (at the time of agreement) to 2%. Further in the matter of change in the spread, the Commission in the APR Order in Case No. 111 of 2008 has observed as under: As regards the resetting of the interest rate from IDFC on account of change in rating of TPC from AAA to AA, the Commission is of the view that the said change may have been on account of performance of other businesses of TPC, as the regulated business of electricity ensures a guaranteed return, which it earns every year. As regards the regulated business of electricity for Mumbai region, the Commission does not observe any critical or significant factor that might have affected its business. On the one hand, TPC talks of Tata Brand Equity, etc., while TPC credit rating has gone down due to other businesses and not TPC. In fact, TPC is the major earner with huge cash balance. Accordingly, the Commission does not agree with the contentions of TPC regarding the impact on interest rate on account of change in credit rating. Further, as regards the resetting of the interest rate, the letter from IDFC clearly mentions that the proposed reset in interest rate is for one year only. The Commission is of the view that TPC should have made adequate efforts to negotiate the interest rate. Even though the interest cost is a pass through in the ARR and subsequently to the consumers, it does not bar TPC from making adequate and sincere efforts in this regard. The Commission, while estimating the interest expense for FY has considered the MERC, Mumbai Page 56 of 167

57 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY average interest rate of 10.95% towards IDFC loan as submitted by TPC, however, for FY , the Commission has considered the interest rate of 8.9% on the basis of earlier terms of the loan agreement. (emphasis added) In reply to Commission s query regarding the reasons and factors resulting in change in credit rating of TPC from AAA to AA, TPC provided the opinion of the Rating Agency. The relevant reasons indicated in ICRA s review of rating are reproduced as under: The rating revision reflects the increase in the overall business and financial risk profile of TPC arising from the large investment being planned, primarily in setting up the 4000 MW Ultra Mega Power Plant (UMPP) at Mundra involving an estimated cost of Rs. 170 billion. The project implementation risks associated with setting up these projects are also sizeable. Since these projects will be majority debt funded, with a long gestation period, TPC s debt servicing indicators are expected to be adversely impacted. ICRA however notes that the acquisition of an equity stake in PT Bumi Resources Tbk provides it with fuel security for a major part of the coal requirement for the UMPP at Mundra. Also, cash infusion through the preferential offer of Rs 12 billion to Tata Sons Limited is a positive from the credit perspective. The rating continues to be supported by the stable cash flows from its licensee business, its superior operating parameters and financial flexibility derived being a part of the Tata group... (emphasis added) The relevant reasons indicated in CRISIL s review of rating are reproduced as under: In CRISIL s opinion the huge capacity expansions and the attendant project implementation risks significantly alter Tata Power s business risk profile, from that of the earlier licensee model. Tata Power plans to almost quadruple its power generation capacity, to about 8700 mega watts (MW), over next five years. This will result in a gradual but inevitable shift in Tata Power s business risk profile from the existing stable licensee business, to bid-out generation projects supplying powers to new areas; the shift exposes the company likely higher counterparty risk, and to constraints in passing on cost increase to its buyers. (emphasis added) In reply to the Commission s query seeking justification for TPC s request for passing on the impact of the change in rating to the Regulated Business in case of the change in rating being on account of reasons not related to the regulated business of Mumbai region, TPC submitted that the rating is for the entire Company and not for a MERC, Mumbai Page 57 of 167

58 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY particular business. When Tata Power was rated AAA, the Company was able to get Rs. 450 Crore loan from IDFC at a very competitive rate of 8.9%. Even at that time, Tata Power had contracted such loans on the basis of ratings of the Company and the benefit of such low cost loans have been passed on to the consumers of Mumbai Licence Area. In reply to the Commission s query regarding the steps taken for negotiating the spread on the interest rate on loan of Rs. 450 Crore availed from IDFC, TPC submitted that IDFC loan was at a pricing of 5 year G-sec +1.45% p.a. for the first 2 years. However, this was on the condition that the rating of the Company should be AAA and hence, the Lender has the right to revise the spread of 1.45% on account of change in rating from AAA to AA in accordance with the provisions of the loan agreement. Accordingly, when the loan came up for reset, in September 2008, IDFC had the right to revise the rate of interest due to the rating trigger clause. Moreover, during that time, interest rates were at a high. After a lot of negotiations, IDFC agreed to give the loan at 13% p.a. but agreed to reset the loan after 1 year. This was the time when the liquidity had dried up and the banks were lending even at the rate up to 18%. The Company had availed a loan of Rs. 500 Crore from State Bank of India (SBI) for six months at the rate of 13.52% p.a. in October Further, in response to the query on the yield of 5-year G-Sec rate as on September 29, 2008, TPC submitted that the same was 8.643%. TPC further submitted that it was also necessary to delink the interest rate applicability from the rating of the Company. Accordingly, in September 2009, when the loan came up for reset, it negotiated with the lender and based on TPC s request the rating trigger was removed from this loan and after negotiation, the loan was reset at IDFC s PLR bps (10.40% p.a.). In reply to the Commission's query, TPC submitted that the 3-year Benchmark rate of IDFC as on September 29, 2009 was at 10.99%. However, TPC did not submit any documentary proof for its submission of the IDFC PLR rate, but at the same time stated that TPC has based the interest rate on the letter of IDFC giving the final applicable rate of 10.40% from September 29, 2009, which has been computed on the basis of the PLR of IDFC. TPC further submitted that between the two reset dates, it also availed Term Loan of Rs. 362 Crore for its wind projects in Samana (Gujarat) and Gadag (Karnataka) at 11.25% and presently the rate of interest on such loan is 10.95% p.a. Thus, TPC submitted that the interest rate for Licenced Area loan is lower than other loans availed by TPC by around 55 bps. TPC further submitted that the spread of 2% is over IDFC s PLR and not over Interest on G-Sec interest rate. MERC, Mumbai Page 58 of 167

59 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY It is evident from the quoted extract of the opinions of the Credit Rating Agencies regarding change in the rating of TPC from AAA to AA, that the same is only on account of the increase in the business risks on account of the proposed investment in the areas other than the Mumbai licenced area. Further, as regards the submission of TPC that the consumers of Mumbai licenced area have availed the benefit of lower interest rate on account of availing loan at a very competitive rate on account of Company s rating, the Commission is of the view that though TPC availed loan at lower interest rate on account of the rating of TPC, however, it is important to note that the Credit Rating Agencies had given a higher rating to TPC on account of the stable licensee business model, which has come in jeopardy, because of TPC's other investments, which have been considered riskier by the Credit Rating Agencies. Hence, in fact, the rating of AAA of TPC was on account of licenced business and not on account of other business, which is also substantiated by the details of the operating income earned during FY between the Mumbai licenced Area and other businesses as shown in the Table below: Rs. Crore Particulars Mumbai Licenced Area Other Total Revenue from Power Supply and Transmission Charges % of Total Revenue 82% 18% 100% It can be observed that around 82% of the total revenue earned by TPC during FY is from the Mumbai Licenced Area. Hence, it is logical to draw the conclusion that the rating of AAA was more on account of the stable Mumbai Licenced Business as against other businesses, more so, when read against the backdrop of the reasons given by the Credit Rating Agencies for downgrading TPC from AAA to AA. Therefore, the Commission is of the view that the impact on the interest cost on account of change in the rating of TPC from AAA to AA, should not be passed on to the consumers and accordingly, the Commission has not considered the impact of the change in interest rate of the IDFC loan to 13% for computing the interest cost pertaining to the IDFC loan, which was triggered by the downgrading of TPC's rating. Accordingly, for the purpose of truing up of interest expenses towards IDFC loan for FY , the Commission has considered an interest rate of 8.90% till the first reset date of September 29, 2009 and an interest rate of 10.09% from the reset date MERC, Mumbai Page 59 of 167

60 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY onwards, which is based on the then prevailing 5-year G-Sec rate as submitted by TPC (8.643%) and the original spread of 1.45%. Thus, a weighted average interest rate of 9.50% has been considered for truing up the interest expenses on IDFC loan of TPC for FY Normative Loan As regards the Normative Loans, TPC-G submitted that the interest rate of 10.95% has been considered in accordance with the rate approved by the Commission for FY for IDFC loan in the APR Order in Case No. 111 of 2008 and quoted the relevant extract of the said Order reproduced as under: The Commission, while estimating the interest expense for FY has considered the average interest rate of 10.95% towards IDFC loan as submitted by TPC-G... As regards the interest rate on the normative loan approved in the APR Order in Case No. 111 of 2008, the Commission has considered the interest rate as 9%. The relevant extract of the said Order is reproduced as under:...the actual interest rate for IDFC loans during part of the last year was 8.9% and considering the normative interest rates allowed by the Commission in the previous Order with respect to interest rates prevailing at that time, the Commission has considered a normative interest rate of 9% for working out the interest expenses for FY (emphasis added) Hence, from the above extract of the APR Order in Case No. 111 of 2008, it is clear that the Commission had considered the normative interest rate of 9% as against 10.95% as submitted by TPC-G. The reference made by TPC-G is towards the interest rate provisionally considered by the Commission for FY towards the IDFC loan and not normative loan. Thus, for the purpose of interest on normative loans for FY , the Commission has considered interest rate of 9% p.a. as approved in the APR Order in Case No. 111 of Previous Year's Loans: The Commission has considered the interest expenditure on the Normative Loans corresponding to capitalised assets only and has considered the interest rate of 10% p.a. for the assets put to use during FY and FY MERC, Mumbai Page 60 of 167

61 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY The summary of the interest expenses as approved in the APR Order, submitted by TPC-G and interest expenses approved by the Commission after truing up is shown in the Table below: Table: Interest Expenses(Rs Crore) Particulars FY APR Order TPC-G Allowed after truing up Op. Balance Additions Repayments Cl. Balance Interest Effective Interest Rate 10.07% 10.67% 9.50% 3.10 INTEREST ON WORKING CAPITAL TPC-G submitted that it has estimated the Interest on Working Capital (IWC) considering average interest 12.75% on the working capital requirement computed in accordance with the MERC Tariff Regulations, with the revised Interest on Working Capital estimated at Rs 126 Crore as against Rs 125 Crore approved by the Commission in the APR Order. However, in response to the Commission s query, regarding the usage of cashflows of TPC-G business and/or cashflows of any other business to meet the working capital requirement, TPC-G stated its difficulty to prepare separate balance sheet for generation, transmission and distribution business since it has been operating under a common balance sheet. Further, in addition, TPC-G stated that it is not possible to prepare cashflow statements separately for various businesses since the Company maintains a common cash balance and therefore, only normative cashflow statement can at best be prepared. On reiterating the requirement of cashflow statement showing as to how the working capital requirement has been met, TPC-G submitted the normative cash flow statement. As regards actual working capital requirements for FY , TPC submitted the working capital requirement for each quarter of FY on actual basis. Further, in reply to the Commission s query, TPC submitted the actual interest paid on working capital for TPC as a whole and the split of the expense incurred towards the same among TPC-G, TPC-T and TPC-D in the ratio of normative working capital. As MERC, Mumbai Page 61 of 167

62 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY per the submission made, the actual interest on working capital considered by TPC-G in FY amounts to Rs Crore. The Commission has estimated the normative working capital requirement and interest thereof for FY based on the revised expenses approved in this Order after truing up. However, interest on working capital is a controllable parameter as defined under the MERC Tariff Regulations and the Commission has therefore, computed the sharing of gains/losses on the basis of normative working capital interest and the actual working capital interest incurred, which in this case is Rs Crore. Further, the MERC Tariff Regulations stipulate that rate of Interest on Working Capital shall be considered on normative basis and shall be equal to the short-term Prime Lending Rate of State Bank of India as on the date on which the Application for determination of tariff is made. As the short-term Prime Lending Rate of State Bank of India at the time when TPC-G filed the Petition for tariff determination for FY was 12.75%, the Commission has considered the interest rate of 12.75% for estimating the normative Interest on Working Capital, which works out to Rs Crore RETURN ON EQUITY (ROE) TPC-G submitted that based on the capital expenditure, capitalisation and normative debt:equity ratio of 70:30, the Return on Equity (RoE) on the equity portion has been computed at 14%. Further, TPC-G has considered RoE based on the opening balance of equity and reduction in equity on account of de-capitalisation of certain assets. Accordingly, TPC-G estimated the RoE as Rs Crore as against the approved RoE of Rs Crore. The Commission has considered reduction in equity corresponding to the assets decapitalised during FY by TPC-G. The Commission has computed the RoE in accordance with Regulations 34.1 and 31 of the MERC Tariff Regulations, which stipulate that the RoE for a Generation Company is to be provided on the opening level of equity. Accordingly, the Commission has not considered the equity corresponding to addition to assets during the year while computing the RoE. Further, the Commission has considered the rate of return as 14% for computation of RoE for FY , in accordance with the MERC Tariff Regulations. Further, it should be noted that TPC-G, as well as other Utilities, have been proposing asset replacement schemes with certain cost-benefit analysis, which have been approved by the Commission in the past, and such replacement schemes have been MERC, Mumbai Page 62 of 167

63 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY implemented by the Utilities. However, the impact of the replacement of the asset has not been clearly shown by the Utilities in terms of reduction in GFA, outstanding loan, if any, accumulated depreciation, as well as equity contribution, to the extent, the old asset that has been replaced. This needs to be done, as the old asset is no longer part of the books of accounts, and all the related components that have a bearing on the tariff also need to be modified correspondingly, since the new asset gets added to the asset base as well as equity base in its entirety. Not deducting all these components of the replaced asset leads to double-accounting of the assets and the related revenue expenses. Hence, the Commission directs TPC-G to submit all the relevant details in this regard for all years from FY onwards for the Commission to ensure that the impact of such asset replacement is passed on in the desired manner to the consumers, and the same can be considered by the Commission in the next Order. The summary of RoE as claimed by TPC-G and approved by the Commission for FY is summarised in the following Table: Table: Return on Equity (Rs Crore) Particulars FY APR Order Apr-Mar Audited Allowed after truing up Regulatory Equity at the beginning of the year Equity Portion of the asset de-capitalised - (22.22) (22.22) Equity considered after de-capitalisation Equity Portion of the capitalised expenditure Regulatory Equity at the end of the year Total Return on Regulatory Equity NON TARIFF INCOME TPC-G submitted that the actual non tariff income for FY is Rs. 18 Crore as against Rs. 9 Crore approved in the APR Order dated May 28, 2009 in Case No. 111 of Out of the total non tariff income of Rs. 18 Crore, TPC-G submitted that income from recurring items corresponds to Rs. 3 Crore, while non-recurring items contributed Rs. 15 Crore. TPC-G provided the details of the non tariff income under various heads. MERC, Mumbai Page 63 of 167

64 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY Considering the details of actual non tariff income submitted by TPC-G, the Commission has allowed the non tariff income of Rs. 18 Crore for FY under the truing up exercise. The summary of the non tariff income approved in the APR Order, actual non tariff income, and that allowed by the Commission after truing up is shown in the Table below: Table: Non Tariff Income (Rs Crore) Particulars APR Order Actual Allowed after truing up Rents Other/Miscellaneous receipts Delayed Payment Charges Interest on staff loans & Advances Sale of Scrap Income from Services Rendered Profit/Loss On Sale / Retirement 2.98 Of Assets Interest on Income Tax/ VAT 4.90 refund 4.90 Liability Written Back Interest on ST Deposit with Bank Total INCOME TAX TPC-G, in its Petition, submitted the Income Tax at Rs 118 Crore for FY as against Rs Crore approved in the APR Order for FY TPC-G further submitted that in the APR Petition for FY in Case No. 111 of 2008, the Income Tax was computed considering the actual income for FY and after considering the various provisions under the Income Tax Act, the allowances and disallowances under Section 32, Section 43 A, 43 B, Section 80 IA, Section 14 and other relevant sections of the Income Tax Act. TPC added that the methodology adopted by TPC-G for computation of the Income Tax is based on the methodology of the Commission for working out the tax by adding the non deductible expenditure for tax to the RoE and then subtracting the Tax deductible expenditure from the same. TPC-G added that the Commission had considered the RoE on pre tax basis as against post tax basis. MERC, Mumbai Page 64 of 167

65 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY TPC-G submitted that it has appealed against the Commission s methodology in the ATE and reserves the right to seek appropriate adjustments for FY based on the decision of the ATE. Pending the decision of the ATE, TPC-G submitted that it has computed the Income Tax based on the approach adopted by the Commission in the APR Order dated May 28, However, while computing the tax for FY , TPC-G has grossed up the RoE and the tax arising therof. TPC-G, in response to the Commission s queries raised regarding the income tax refunds received by TPC, submitted that an amount of Rs Crore was received as refund during FY TPC submitted the following table depicting the refund received by TPC in FY MERC, Mumbai Page 65 of 167

66 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY Further, TPC stated that income tax refunds received by TPC pertain to the entire Company. TPC further stated that Tata Power creates provisions of expected tax liability based on the Income Tax laws and previous Judgments of Income Tax Appellate Tribunal and this provision is considered for ARR and Profit and Loss statement. TPC reiterated that benefits of the refund have already been passed on to the consumers by considering lower provision. TPC further submitted that for FY , the income tax computation presented in the Petition is based on the methodology approved by the Commission with deviations as mentioned in the Petition and hence, the actual tax payment and refund may not have any relevance to the tax claimed in the ARR. As regards the contention of TPC that the benefits of tax refunds have already been passed on to the consumers by considering lower provision in the past, the Commission is of the view that if such is the case, then it implies that TPC has provisioned lower tax in ARR and accounts than what was actually paid, which appears to be an unrealistic scenario. Thus, the Commission does not find any merit in TPC's contention that the benefit of refund has already been passed on to the consumers. However, the Commission also observes that the tax refund details submitted by TPC pertains mainly to assessment year prior to , when the regulatory process of approval of ARR of TPC had just recently commenced. From the table given above, it is observed that a tax refund of only Rs Crore pertains to the tax refunds for assessment years after FY , which needs to be considered by the Commission. Further, such a refund, if taken into consideration in the present Order will lead to apportioning of such refund among RInfra-D, TPC and BEST and further between Generation, Transmission and Distribution Businesses of TPC. The procedure appears to be quite tedious as far as the present APR exercise is concerned and therefore, the impact of tax refund has not been considered by the Commission in the present APR process. In response to the Commission s query regarding availing of MAT credit in FY , TPC submitted that no MAT credit was availed in FY For the purpose of income tax computations, the Commission has considered the RoE as the regulatory profit before tax, in accordance with the approach adopted by the Commission in the previous APR Order, pending the decision of the ATE in the matter of methodology for tax computation. Further, the Commission has not grossed up such RoE component for income tax, since the income tax is being allowed as an expense under the ARR, in accordance with the MERC Tariff Regulations. The MERC, Mumbai Page 66 of 167

67 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY summary of the income tax computations as approved by the Commission is shown in the following Table. Table: Summary of approved Income Tax for FY Particulars Rs. Crore Return on Equity Incentive Add: Normative Interest on Working Capital Less: Actual Interest on working capital Interest on loan approved by Commission Less: Actual Interest on Long Term loan (IDFC loan) Add: Regulatory Depreciation Less: Tax depreciation Add: Other Disallowances for computing Income Tax Less: Other Expenses allowed for computing income tax Less: Deductions under S. 80-G, 80 IA Total Corporate Tax Rate (%) 33.99% Income Tax REVENUE FROM SALE OF POWER TPC-G, in its Petition, has submitted the details of revenue from sale of power to the three Distribution Licensees of Mumbai Region, viz., TPC-D, BEST and RInfra-D, under various heads like fixed charge, energy charge, hydro rebate, etc., as shown in the Table below: Table: Details of Revenue from sale of power as submitted by TPC-G Sr. No. Particulars Unit BEST REL / RInfra Tata Power-D Total Rs. 1 Fixed Charge Crore Rs. 2 Incentive Crore Rs. 3 Hydro Rebate Crore Energy Rate Rs./kWh Energy Sold MU 4,756 2,973 2, Rs. 6 Energy Charge Crore 2,020 1, Cash Discount / Settlement of previous issues Total = Rs. Crore Rs. Crore ,215 1,398 1,333 4,945 MERC, Mumbai Page 67 of 167

68 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY Based on the details of the revenue submitted by TPC-G, the Commission has considered the total revenue from sale of power during FY to BEST, RInfra- D and TPC-D as Rs Crore, Rs Crore and Rs 1333 Crore, respectively INCENTIVE ON PLF AND CAPACITY INDEX TPC-G, in its Petition, submitted that the MERC Tariff Regulations permit incentive for thermal generation higher than PLF of 80% and on capacity index higher than 85% for hydro plants. The incentive due to TPC-G for FY works out to Rs 39 Crore. The incentive computations submitted by TPC-G for thermal and hydro stations are given in the following Tables: Table: Incentive Computations for thermal units as submitted by TPC-G Unit Actual Net Generation (MU) Net Gerneration at 80% PLF (MU) Energy eligible for incentive (MU) Rate of Incentive (Rs./kWh) Incentive (Rs. crore) Unit Unit 5 4, , Unit 6 3, , Unit , Total 9, , Table: Incentive Computations for hydro stations as submitted by TPC-G Station Actual Capacity Index - CIA (%) Normative Capacity Index CIN (%) Diff. in Cap. Index eligible for incentive (%) AFC as approved (Rs Crore) Incentive (Rs Crore) Khopoli 98.25% 85% 13% 76 7 Bhivpuri 99.14% 85% 14% 55 5 Bhira 93.82% 85% 9% 80 5 Total 16 For Thermal stations, the Commission has approved the incentive as submitted by the TPC-G. However, for hydro stations, the Commission observed that TPC-G has computed the incentive on actual Annual Fixed Charge (AFC) rather than AFC approved by the Commission. The Commission is of the view that since the AFC is not being re-determined on retrospective basis, therefore, incentive component should be computed on approved AFC. The Commission has re-determined the tariff for Hydro generating stations considering the AFC approved in its MYT Order. The total MERC, Mumbai Page 68 of 167

69 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY incentive approved by the Commission for hydro generating stations works out to Rs Crore as against Rs.16 Crore submitted by TPC-G, as shown in the Table below: Table: Incentive Computations for hydro stations as approved by the Commission ` Actual Capacity Index - CIA (%) Normative Capacity Index CIN (%) Diff. in Cap. Index eligible for incentive (%) Khopoli 98.18% 85.00% 13.18% Bhivpuri 98.71% 85.00% 13.71% Bhira 93.82% 85.00% 8.82% Total AFC as approved (Rs Crore) Incentive (Rs Crore) INCENTIVE DUE TO HIGHER GENERATION FROM HYDRO STATIONS DURING PEAK HOURS As regards the incentive due to higher generation from hydro stations during peak hours, TPC-G submitted that the Commission in its APR Order dated April 2, 2008 with regards to generation during peak period from hydro stations stipulates as follows: However, there is need to provide some incentive to Generating Companies and Distribution Licensees to optimise the hydel generation during peak hours. The Commission allows 5% of excess recovery of revenue from hydel stations on account of higher generation during peak hours to be shared between Generating Company and Distribution Licensees in proportion of 50:50. The share of the distribution licensees in the additional excess recovery in case the actual hydel generation during peak hours is higher than the target specified, will be shared by the Distribution Licensees in proportion to their share of generation capacity of TPC-G. Accordingly, TPC-G submitted that the incentive amount on account of the above works out to the following: MERC, Mumbai Page 69 of 167

70 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY Table: Incentive due to higher generation from Hydro stations submitted by TPC-G Particulars Units Peak Period Off-Peak Period Total Rate a Rs./kWh Ratio of Generation in Tariff Order b 50% 50% Actual Generation c MU ,144 Actual Generation using Tariff Order Ratio d MU ,144 Difference e= c-d MU 12 (12) - Benefits f = e * a / 10 Rs. Crore 24 (20) 4.2 Share of TPC-G g = f * 0.5 Rs. Crore 12 (10) 2.1 The Commission would like to clarify that in the APR Order for FY , the Commission stated that 5% of excess recovery of revenue would be shared between Generating Company and Distribution Licensees in proportion to 50:50, however, the Commission observed that TPC-G has computed its 50% share of the excess recovery of revenue with the Distribution Licensees. The Commission has recomputed the excess recovery of revenue and approved Rs.0.71 Crore as against Rs.2.1 Crore as shown in the Table below: Table: Incentive due to higher generation from Hydro stations approved by Commission Particulars Units Commission Approved Peak Period Off-Peak Period Rate a Rs./kWh Total Actual Generation b MU Revenue Earned by Hydel Generation c=a*b/10 Rs. Crore AFC Approved in APR Order d Rs. Crore Excess Revenue e=c-d Rs. Crore % of excess revenue f=5%*e Rs. Crore 1.42 TPC-G share of excess Revenue g=50%*f Rs. Crore SHARING OF GAINS AND LOSSES FOR FY TPC-G has submitted the actual expenditure under various heads of expenditure and the reasons for variation between the approved expenditure and the actual expenditure. Further, TPC-G has categorised these expenses as controllable and uncontrollable and computed the gains and losses for the controllable expenditure and shared the same with the Distribution Licensees. The relevant provisions under the MERC, Mumbai Page 70 of 167

71 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY MERC Tariff Regulations stipulating sharing of gains/losses due to controllable factors are reproduced below: Some illustrative variations or expected variations in the performance of the applicant which may be attributed by the Commission to controllable factors include, but are not limited to, the following: (a) Variations in capital expenditure on account of time and/ or cost overruns/efficiencies in the implementation of a capital expenditure project not attributable to an approved change in scope of such project, change in statutory levies or force majeure events; (b) Variations in technical and commercial losses, including bad debts; (c) Variations in the number or mix of consumers or quantities of electricity supplied to consumers as specified in the first and second proviso to clause (b) of Regulation ; (d) Variations in working capital requirements; (e) Failure to meet the standards specified in the Standards of Performance Regulations, except where exempted in accordance with those Regulations; (f) Variations in labour productivity; (g) Variations in any variable other than those stipulated by the Commission under Regulation 15.6 above, except where reviewed by the Commission under the second proviso to this Regulation The approved aggregate gain to the Generating Company or Licensee on account of controllable factors shall be dealt with in the following manner: (a) One-third of the amount of such gain shall be passed on as a rebate in tariffs over such period as may be specified in the Order of the Commission under Regulation 17.10; (b) In case of a Licensee, one-third of the amount of such gain shall be retained in a special reserve for the purpose of absorbing the impact of any future losses on account of controllable factors under clause (b) of Regulation 19.2; and (c) The balance amount of gain may be utilized at the discretion of the Generating Company or Licensee The approved aggregate loss to the Generating Company or Licensee on account of controllable factors shall be dealt with in the following manner: MERC, Mumbai Page 71 of 167

72 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY (a) One-third of the amount of such loss may be passed on as an additional charge in tariffs over such period as may be specified in the Order of the Commission under Regulation 17.10; and (b) The balance amount of loss shall be absorbed by the Generating Company or Licensee. The treatment (controllable or uncontrollable) proposed by TPC for variation in various heads of expenditure is given in the Table below: Table: Controllable and Uncontrollable factors proposed by TPC-G Sr. No. Particulars Category TPC-G s Remarks 1 Fuel Cost Uncontrollable Uncontrollable to the extent of the fuel prices and controllable to the extent of the operational parameters 2 O&M expenditure Controllable Uncontrollable to the extent they arise due to factors such as increase in statutory levies, taxes, changes due to requirements of other utilities and other bodies such as municipal authorities, MbPT, etc. 3 Interest on Normative Loans 4 Interest on Working Capital 5 Other Finance Charges 6 Depreciation & Advance against Depreciation Uncontrollable Controllable to the extent they arise due to delay in completion of the project thereby leading to increase in the completed project cost and such increase is not approved by the Commission. Uncontrollable Uncontrollable as worked out on normative basis at target availability. Controllable Uncontrollable Controllable to the extent they arise due to delay in completion of the project thereby leading to increase in the completed project cost and such increase is not approved by the Commission. 7 Income Tax Uncontrollable 8 Return on Equity Uncontrollable Computed based on principles outlined by the Commission in the Tariff regulations. 9 Non-Tariff income Uncontrollable Controllable to the extent of the recurring portion of such non-tariff income. The Commission has not accepted the above and has considered the performance parameters and expenses for computing the sharing of gains/losses in accordance with the MERC Tariff Regulations, as elaborated below: Fuel Cost and reduction in auxiliary consumption TPC-G submitted that the variation in the fuel cost is due to variation in the operational parameters of the generating units, which are controllable factors. For Unit-4, Unit-6 and Unit-7, TPC-G computed the fuel cost based on the approved MERC, Mumbai Page 72 of 167

73 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY operational norms of Heat rate, while for Unit-5 TPC-G computed the fuel cost based on actual Heat rate. For auxiliary consumption, TPC-G computed the efficiency gains with respect to norms approved by the Commission. The total efficiency gains estimated by TPC-G works out to Rs. 70 Crore, which has been shared with the Distribution Licensees to the extent of Rs. 23 Crore (one-third). The summary of the efficiency gain on account of fuel cost as proposed by TPC-G has been shown in the Table below: Table: Gain and loss due to variation in fuel cost as proposed by TPC-G (Rs Crore) Unit 4 Unit 5 Unit 6 Unit 7 FHC & Other Total Fuel Cost Particulars Adjustment Fuel Cost (Rs. Crore) a Actual Heat Rate b Normative Heat Rate c Fuel Cost applying Normative Gross Heat Rate (Rs. Crore) d=(c/b)*a Net Gains/ (Loss) (Rs. Crore) e=d-a Passed on to the Dist. Licenses j=(1/3)*e In addition to the variation in the SHR, TPC-G submitted that there are variations in the actual auxiliary consumption of the Units vis-à-vis the approved parameters. The summary of the efficiency gain on account of auxiliary consumption as proposed by TPC-G has been shown in the Table below: Table: Gain and loss due to variation in Aux. Consumption as proposed by TPC-G (Rs Crore) Units Unit 4 Unit 5 Unit 6 Unit 7 Hydro Total Particulars Formula Gross Generation 1 Actual Aux Cons 2 MU % 7.65% 4.74% 3.08% 2.42% 0.61% MU Actual Aux Cons 3=1*2 Actual Net Generation 4=1-3 Normative Aux Cons. 5 MU % 8% 5.50% 3.50% 2.75% 0.50% MERC, Mumbai Page 73 of 167

74 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY Normative Aux Cons. 6=1*5 Normative Net Generation 7=1-6 Diff in Net Generation 8=4-7 MU MU MU Rs Crore 145 T.O Fixed Cost 9 T.O Variable Cost 10 T.O Gross Generation 11 Rs Crore MU MU T.O Net Generation 12=11*5 13=10/12 Rs./kWh *10(for thermal) pr 13=9/12* 10 (for T.O Rate Hyd) Auxiliary Rs Crore Consumption Gain 14=13*8 Passed on to the 15=1/3*1 Rs Crore 6 Dist. Licensee 4 ^ T.O= APR Order for FY As discussed in the above Section, for computing the efficiency gain/loss, the Commission has considered the approved normative Heat rate for FY for each Unit in the MYT Order except for Unit-5 and Unit-7 wherein the Heat rate as approved in this Order has been considered by the Commission for approving the fuel costs. Therefore, the Commission has considered the total efficiency gain on account of fuel cost approved by the Commission, which works out to Rs.68 Crore, one-third of which has been passed on to the Distribution Licensees. The summary of the efficiency gain on account of fuel cost as approved by the Commission has been shown in the Table below: Table: Gain and loss due to variation in fuel cost as approved by the Commission (Rs Crore) Unit 4 Unit 5 Unit 6 Unit 7 FHC & Other Adjust ment Particulars MERC, Mumbai Page 74 of 167 Total Fuel Cost

75 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY Fuel Cost (Rs. Crore) a Actual Heat rate b Normative Heat rate c Fuel Cost applying Normative Gross Heat rate d=(c/b)*a Net Gains/ (Loss) (Rs. Crore) e=d-a Passed on to the Distribution Licenses f=(1/3) *e The Commission has considered the benefit of reduction in auxiliary consumption in terms of sharing of efficiency gains. Therefore, for the Units of Trombay Station, the Commission has estimated revenue from energy charge from sale of additional power on account of reduction in auxiliary consumption, at Rs Crore. In accordance with the MERC Tariff Regulations, one third of the gain has to pass on to Distribution Licensees and two thirds of such gain has been allowed to be retained by TPC-G. The summary of the efficiency gain on account of auxiliary consumption approved by the Commission has been shown in the Table below: Table: Gain and loss due to variation in Aux. Consumption approved by Commission (Rs Crore) Particulars Unit Unit-4 Unit-5 Unit-6 Unit-7 Hydel Total Rate of Energy Charges- as approved in the Order for FY Additional Sales due to better Auxiliary Consumption Additional Revenue due to better Auxiliary Consumption Rs./kWh MU Rs Crore MERC, Mumbai Page 75 of 167

76 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY Accordingly, the total efficiency gain on account of fuel cost approved by the Commission and on account of additional revenue due to reduced auxiliary consumption works out to Rs 85 Crore, as against the estimate of Rs. 87 Crore by TPC-G. Interest on Working Capital As discussed in the earlier paragraph, the actual interest on working capital incurred by TPC-G during FY is Rs Crore and the normative interest on working capital approved by the Commission considering other elements of expenses as approved after truing up, works out to Rs Crore. The Commission has considered the difference between normative interest on working capital and actual interest on working capital as an efficiency gain and has considered sharing of the same with the Distribution Licensees in accordance with the MERC Tariff Regulations, as shown in the Table below. Further, the detailed rationale for sharing the efficiency gains in respect of interest on working capital for FY has been provided in Section 4.3 of this Order. Table: Gain and loss due to variation in Interest on Working Capital as approved by the Commission Particulars Normative Interest on Working Capital Rs. Crore (Rs Crore) Actual Working Capital Amount Passed on to the Distribution Licensees Amount retained by TPC-G Net Entitlement of TPC-G Gap/(Surplus) for FY based on truing up and sharing of efficiency gains/losses Based on the truing up of various elements of expenses and revenue and TPC-G s share of efficiency gains/losses, the Commission has estimated the total deficit as Rs. 75 Crore as against the deficit of Rs. 189 Crore estimated by TPC-G for FY The summary of the net ARR and efficiency gains as approved by the Commission for FY is given in the following Table: MERC, Mumbai Page 76 of 167

77 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY Table: Summary of Truing up for FY including sharing of Efficiency gains (Rs Crore)Error! Not a valid link. S.No. Particulars Order Actual Approved After Truing-up FY Entitlement as per Regulations/Order Efficiency Gains shared with Distribution Licensees Net Entitlement A Expenditure 1 Fuel Related Expenses 3, , , , , Operation & Maintenance Expenses Employee Expenses Administration & General Expenses Repair & Maintenance Expenses Allocation of LCC cost Depreciation, including advance against depreciation Interest on Long-term Loan Capital Interest on Working Capital 5 Other Finance Charges 6 Other Expenses (0.19) MERC, Mumbai Page 77 of 167

78 Case No. 96 of 2009 MERC Order for TPC-G for APR of FY and Determination of Tariff for FY Income Tax Total Expenditure 3, , , , , B Return on Equity C Incentive for Higher PLF, CI & Peak hour Generation D Total including expenditure +RoE +Incentive 5, , , , , E Revenue 1 Revenue from sale of electricity 4, , , , , Additional Revenue due to Reduced Aux Consumption Other Income F Total Revenue 4, , , , , G Revenue Gap/(surplus) MERC, Mumbai Page 78 of 167

79 4 REVISED CAPITALISATION FOR FY In the previous APR Order dated May 28, 2009, while truing-up of FY , the Commission provisionally considered capitalisation of Rs Crore as against Rs Crore and directed TPC-G as under: As regards whether projected benefits have actually accrued for the benefit of consumers, the Commission directs TPC-G to submit the detailed report with established benefits vis-à-vis the benefits projected, within one month from the issuance of this Order. TPC-G submitted that the Commission in its Tariff Order dated May 28, 2009, had not considered capitalisation of certain DPR schemes on account of either absence of in-principle approval or pending ascertainment of benefits accrued on account of the respective schemes and considered 50% of actual capitalisation of Non-DPR schemes pending ascertainment of benefits accrued on account of the respective schemes. TPC-G submitted that in compliance of the directions of the Commission, it had submitted the details of the schemes and benefits that have been accrued vide their letters dated June 29, 2009, July 1, 2009, July 14, 2009 and July TPC-G requested the Commission to grant approval to the capitalisation in FY TPC-G submitted that actual capitalisation in FY was Rs Crore, which included Rs Crore and Rs Crore on account of DPR Schemes and Non- DPR Schemes respectively. The Commission has approved the capitalisation submitted by TPC-G except for the capitalisation of the captive coal berth at Trombay, as this scheme has been approved to be capitalised in FY and FY Hence, no capitalisation for this scheme has been approved for FY The Capitalisation as submitted by TPC-G and approved by the Commission is tabulated as under: Table: Revised Capitalisation in FY (Rs. Crore) Particulars Approved in previous APR Order FY TPC-G Approved Total Schemes approved after capping DPR Schemes MERC, Mumbai Page 79 of 167

80 Non-DPR Schemes DEPRECIATION In the previous APR Order, the Commission permitted depreciation expenditure of Rs Crore which amounts to 1.87% of opening level of Gross Fixed Assets (GFA) of TPC-G for FY , which was considered as Rs Crore. The ATE, in its Judgment in Appeal No. 137 of 2008, ruled as under: 31. In view of the provisions of the Tariff Regulations the Companies Act and the Accounting Standard-6, we find full justification and rationale in the contention of the appellant that proportionate depreciation has to be allowed even for part of the year when the assets have been put to use. The asset once put to use will be exposed to wear and tear which will not wait to depreciate till the start of the new financial year. We, therefore, allow the appeal in this view of the matter also. TPC-G submitted that therefore, it is entitled to recover the entire amount disallowed under this head for FY Therefore, the Commission has recalculated the depreciation in FY , based on approved capitalisation. The Commission observed that there is retirement of assets of Rs Crore against the assets addition of Rs Crore during FY , due to which the total depreciation during FY has reduced by Rs Crore. The depreciation as allowed by the Commission in this APR Order for FY is tabulated as under: Table: Revised Depreciation in FY (Rs. Crore) Particulars TPC-G in previous APR Petition FY Approved in previous APR Order Approved in this APR Order Net impact Depreciation (0.08) 4.2 INTEREST EXPENSES In previous APR Order, the Commission considered interest expenses of Rs Crore as against Rs Crore as submitted by TPC-G in its previous APR Petition corresponding to the outstanding loans and new loans drawal during FY The MERC, Mumbai Page 80 of 167

81 Commission approved IDFC loan of Rs Crore (70% of approved capitalisation in last APR Order) during FY in previous APR Order. Since the Commission has revised the capitalisation during FY in this APR Order, the loan drawal during FY has been recalculated as Rs Crore corresponding to the capitalisation of Rs Crore during FY as approved by the Commission in this Order. The Commission observed that the TPC has availed the total loan of Rs. 450 Crore from IDFC Ltd. in accordance with the terms and conditions of the Loan Agreement dated September 28, The Commission in its Tariff Order for Trombay No. Unit 8, dated January 19, 2010, in Case No. 35 of 2009 had approved the loan amount of Rs Crore from IDFC for the financing of Trombay Unit No. 8 of TPC-G. Effectively, the other schemes that have been funded by IDFC loan, amounts to Rs Crore since only Rs. 450 Crore has been disbursed by IDFC till date. The Commission has considered this available amount of Rs Crore for funding the capitalisation for TPC-T, TPC-D and existing Units of TPC-G, in the ratio of the actual capitalisation during those years. Accordingly, for utilising the remaining IDFC loan of Rs Crore, the Commission has considered the financing of Rs Crore in FY for TPC- T, TPC-D and existing Units of TPC-G, in accordance with values approved in previous APR Order dated May 28, 2009, in Case No. 111 of Further, the remaining IDFC loan left after utilisation of Rs Crore amounts to Rs Crore for existing stations of Generation, Transmission and Distribution Business of TPC, which the Commission has allocated in the ratio of the actual capitalisation for these businesses during FY The summary of the IDFC loan utilised for TPC-T, TPC-D, Trombay Unit No.8 and existing Units of TPC-G is shown in the Table below: Table: IDFC Loan as approved by the Commission (Rs. Crore) IDFC Loan (Rs. 450 Crore) Year Unit 8 * TPC-G TPC-T TPC-D Total =2+3+4 Approved in APR FY Order for FY Approved MERC, Mumbai Page 81 of 167

82 FY Approved in APR Order for FY Approved Total *approved in Tariff Order for Unit-8 in Case No. 35 of 2009 Therefore, the Commission has considered actual loan from IDFC of Rs Crore and normative loan of Rs Crore in FY The Commission has considered interest rate of 8.90% for IDFC Loan for FY , as submitted by TPC-G in last APR Petition. As regards interest rate of normative loan, the Commission has considered interest rate of 8.90% for normative loan in FY The interest expense as approved by the Commission in this APR Order for loans in FY is tabulated as under: Table: Interest in FY (Rs. Crore) FY Particulars Submitted in Approved in Approved in last last APR this APR APR Order Petition Order Op. Balance Additions Repayments (22.39) (22.39) (22.39) Cl. Balance Interest Effective Interest Rate 9.79% 9.75% 9.75% 4.3 RETURN ON EQUITY In previous APR Order, the Commission approved Return on Equity of Rs Crore as against Rs Crore submitted by TPC-G in its previous APR Petition in accordance with MERC Tariff Regulations. As RoE is allowed only on opening balance of equity, the addition of assets have no impact on RoE. Therefore, the revision of capitalisation has not impact on RoE. RoE as approved by the Commission during FY in this APR Order is tabulated as under: Table: Return on Equity in FY (Rs. Crore) Particulars TPC-G in previous APR Petition FY Approved in previous APR Order Approved in this APR Order MERC, Mumbai Page 82 of 167 Net impact

83 Return on Equity TOTAL IMPACT OF REVISION IN CAPITALISATION DURING FY Based on the above discussion, the total impact of revision in capitalisation after submission of detailed report by TPC-G is tabulated as under: Table: Impact of revised capitalisation in FY (Rs. Crore) Particulars FY Net Impact Submitted in last APR Petition Approved in last APR Order Approved in this APR Order Depreciation (0.08) Interest Return on Equity Total 0.77 MERC, Mumbai Page 83 of 167

84 5 IMPACT OF JUDGMENT OF APPELLATE TRIBUNAL FOR ELECTRICITY (ATE) AND PREVIOUS YEARS TRUING UP 5.1 BACKGROUND As discussed in Section 1, the Commission issued the Order on the Tariff Petition of TPC-G for FY (Case No. 68 of 2007) on April 2, In the said Order, the Commission had undertaken the truing up of the expenditure for FY TPC appealed (Appeal No.137 of 2008) against the Commission s APR Order, before the ATE. The ATE issued its Judgment on TPC s above-said Appeal on July 15, TPC submitted that the ATE has allowed TPC s appeal on the following issues and accordingly, it is entitled to recover certain amount of expenditure disallowed by the Commission in its Order dated April 2, ADMINISTRATIVE & GENERAL EXPENSES TOWARDS TATA BRAND EQUITY On the issue of disallowance of the expenses on Brand Equity for FY , the Commission, in its Order dated April 2, 2008, stipulated as follows: The Commission is of the opinion that this expense of Rs 7.29 Crore towards Tata Brand Equity is a sort of internal arrangement between the Group Companies and this amount is paid to the promoter of the Company, viz., Tata Sons. The kind of support provided by Tata Sons to TPC, as stated by TPC in above paragraphs is normal and usually in business, the promoter provides such support to its Group Companies as it also earns returns from its Group Companies. TPC itself is a 100 year old business and a brand name in its own right and with assured returns in a regulated business, has all the financial and other goodwill to conduct its business optimally. Therefore, the amount paid by TPC to Tata Sons under Tata Brand Equity should not be separately allowed, as it would amount to provide the promoters additional return on equity. As per the MERC Tariff Regulations, a Generating Company can only be provided a regulated Return on Equity of 14% on the regulatory equity as estimated by the Commission and if any expense towards the Tata Brand Equity is allowed, then it would tantamount to allowing a higher Return on Equity. For FY , if this expense of Rs 7.29 Crore is considered, the ROE works out to around 14.7%. TPC, in its additional submissions, has MERC, Mumbai Page 84 of 167

85 stated that the ceiling for expenditure under this head is Rs 50 Crore and if Rs 50 Crore is considered as additional return (to be shared between TPC-G, TPC-T and TPC-D in proportion to their RoE), than the effective RoE works out to more than 17%. The ATE, in its Judgment in Appeal No. 137 of 2008 on this issue, ruled as under: 13. It has been brought to our notice that Tata Group commenced its first business operation in India in 1868 and the power sector business operations started on November 07, A Tata group Brand Equity initiative was launched in 1998 to initiate a corporate identity programme in order to sustain the power of the Tata Brand, Tata Sons Ltd. being the owner of the Tata main. The Tata Group of Companies, by a High Court order, amalgamated into the Tata Power Company Ltd. in November It is evident that the Tata Brand Equity entails many benefits to the Tata Power Company such as instilling confidence, attain market leadership through Tata Business Excellence Model of the Tata Code of Conduct. The Tata Group promotes Tata Power Co. through advertisement, makes available central services like recruitment, training courses and common procurement services. This facilitates purchases at competitive rates, provides access to credit and loan facilities at competitive rates. The Brand name helps in attracting good human resource talent etc. 14. In view of the obvious immense benefits available due to Tata Brand Equity and the expenditure incurred by the Tata Sons Group on promotion of Brand Equity, it is only fair and equitable that Tata Power Company contributes their share for promotion of Tata Brand Equity to the parent company and such expenditure should form part of the A&G expenses. We, therefore, decide that TPC is entitled to Tata Brand Equity Expenses for FY , and TPC-G in its Petition submitted that, in accordance with the ATE Judgment in Appeal No. 137 of 2008, it is entitled to recover the entire disallowed amount for FY , FY and FY The summary of the impact of ATE Judgment in Appeal No. 137 of 2008 on brand equity as submitted by TPC-G is shown in the Table below: MERC, Mumbai Page 85 of 167

86 Table: TPC-G submission on A&G expenditure due to Brand Equity (Rs Crore) Particulars FY FY Actual A&G expenditure A&G expenditure allowed after Truing up * Disallowance on account of Brand Equity Amount of disallowed quantum to be now allowed due to ATE Judgment (*disallowance of Brand Equity and Contributions to Donations) Further, TPC in its respective APR Petitions for FY for TPC-T and TPC-D, has also sought entitlements of disallowed expenditure in respect of Brand Equity, based on the ATE Judgment in Appeal No. 137 (Judgment common to TPC-G, TPC- T and TPC-D). The summary of expenditure, which TPC is entitled to recover based on the ATE Judgment in respect of Brand Equity for TPC-G, TPC-T and TPC-D, for FY , FY and FY , as submitted by TPC is given as under: Table: Brand Equity entitlements for TPC as a whole (submitted by TPC) Rs Crore FY TPC-G TPC-T TPC-D TPC FY FY FY TPC has provided the computation of Brand Equity payment and the copy of the Brand Equity & Business Promotion Agreement. Based on the details submitted regarding revenue considered for computing Brand Equity, the Commission observed that TPC is considering a revenue for computing the brand equity expenses other than that mentioned in the allocation statement for revenue and expenses duly certified by the Chartered Accountant. In response to a query raised in this regard, TPC submitted that the Brand Equity expenditure computation is based on the entire revenue of the Company, which includes Revenue from power supply and Transmission Charges as well as some other income heads provided as under. a) Income from Operations, b) Cash discounts, c) Income in respect of services rendered, d) Revenue transmission EPC bus unit, MERC, Mumbai Page 86 of 167

87 e) Delayed payment charges, and f) Sale of Electronic Products. Further, based on the details submitted by TPC, the Commission observed that for computation of Brand Equity for the current financial year, TPC has considered the income of the current financial year as against the income of the preceding financial year, which should have been considered by TPC as per the Brand Equity & Brand Promotion Agreement. In response to the Commission's query in this regard, TPC submitted that as per the Brand Equity Agreement, subscription is paid on the Annual Net income as stated in the audited financial year immediately preceding the year in which the use occurs. Further TPC submitted that such a formula is for the payment of the Brand Equity and hence, the payment made in Year 2 is against the liability created in Year 1 and a separate liability is created for Year 2 based on Year 2 s revenue which will be paid off next year. The Commission does not find any merit in TPC's above explanation. The Brand Equity Agreement states that the payment towards Brand Equity has to be computed on the basis of Annual Net income of the financial year immediately preceding the year in which the use occurs. In other words, Brand Equity payment in FY would be linked to the annual net income of FY and so on, whereas TPC has considered Brand Equity payment in FY based on the annual net income of FY itself. TPC's explanation regarding actual payment happening in the next year is of no consequence, since the expenses and revenue are being considered on "accrual basis" rather than cash basis. As a result of TPC's method of computing the Brand Equity expenses, the same have effectively been advanced by one year, i.e., the Brand Equity amount that was payable in FY has actually been paid in the earlier year, i.e., FY , and this shift of one year has continued. At the same time, it is not that the Brand Equity payment was not due at all, and it is only a question of timing. Since, all these expenses are now being allowed due to the ATE Judgment and are for past years, the Commission is of the view that there would be not much merit in shifting the Brand Equity expenses allowable by one year. Hence, for the purpose of truing up for previous years, the Commission has not disallowed any part of the Brand Equity expenses, on the above account. However, TPC should ensure that henceforth, the Brand Equity expenses are computed exactly as provided for in the Brand Equity & Brand Promotion Agreement, on the Annual Net income of the financial year immediately preceding the year in which the use occurs. MERC, Mumbai Page 87 of 167

88 Further, based on the methodology and other relevant details submitted by TPC, the Commission has re-computed the Brand Equity expenses, which are slightly different than that submitted by TPC. The Brand Equity expenses submitted by TPC and as computed by the Commission are as under: Table: Brand Equity entitlements for TPC as a whole (Commission) Rs Crore FY TPC-G TPC-T TPC-D TPC FY FY FY In accordance with the ATE Judgment in Appeal No. 137 of 2008 on this issue, the Commission has considered the additional allowable expenses on account of Brand Equity for FY , FY and FY based on the Commission's computations, as shown in the above table. Accordingly, for TPC-G, the Commission has considered the additional allowable expenses on account of Brand Equity as Rs Crore, Rs Crore, and Rs Crore for FY , FY and FY , respectively. 5.3 INTEREST ON WORKING CAPITAL On the issue of interest on working capital for FY , the Commission in its above said Order dated April 2, 2008, stipulated as follows: As discussed in the above paragraphs, the actual interest on working capital incurred by TPC during FY is nil and the normative interest on working capital approved by the Commission considering other elements of expenses as approved after truing up, works out to Rs Crore. As the actual expenditure under this head is zero, the Commission has considered the entire normative interest on working capital as efficiency gain and has considered sharing of the same (difference between normative interest on working capital and actual interest on working capital) with the distribution licensees. The ATE, in its Judgment in Appeal No. 137 of 2008, ruled as under: MERC, Mumbai Page 88 of 167

89 20. In Appeal No.111/08, in the matter of Reliance Infrastructure v/s MERC and Ors., this Tribunal has dealt the same issue of full admissibility of the normative interest on Working Capital when the Working Capital has been deployed from the internal accruals. Our decision is set out in the following paras of our judgment dated May 28, 2008 in Appeal No. 111 of ) The Commission observed that in actual fact no amount has been paid towards interest. Therefore, the entire interest on Working Capital granted as pass through in tariff has been treated as efficiency gain. It is true that internal funds also deserve interest in as much as the internal fund when employed as Working Capital loses the interest it could have earned by investment elsewhere. Further the licensee can never have any funds which has no cost. The internal accruals are not like some reserve which does not carry any cost. Internal accruals could have been inter corporate deposits, as suggested on behalf of the appellant. In that case the same would also carry the cost of interest. When the Commission observed that the REL had actually not incurred any expenditure towards interest on Working Capital it should have also considered if the internal accruals had to bear some costs themselves. The Commission could have looked into the source of such internal accruals or funds could be less or more than the normative interest. In arriving at whether there was a gain or loss the Commission was required to take the total picture into consideration which the Commission has not done. It cannot be said that simply because internal accruals were used and there was no outflow of funds by way of interest on Working Capital and hence the entire interest on working capital was gain which could be shared as per Regulation No. 19. Accordingly, the claim of the appellant that it has wrongly been made to share the interest on Working Capital as per Regulation 19 has merit. 15. b): The interest on Working Capital, for the year in question, shall not be treated as efficiency gain. 21. In view of our earlier decision on the same issue we allow the appeal in this regard also.. TPC-G submitted that therefore, the interest on working capital should not be treated as efficiency gain, and TPC-G is entitled to recover the entire amount of interest on working capital passed on as efficiency gain to Distribution Utilities. The summary of MERC, Mumbai Page 89 of 167

90 the impact of ATE Judgment in Appeal No. 137 of 2008 on interest on working capital as submitted by TPC-G is shown in the Table below: Table: Interest on Working Capital entitlements for TPC-G (submitted by TPC) Rs crore Particulars FY FY Normative working capital interest Actual working capital interest Efficiency gain computed by Commission Further, TPC in its APR Petition for FY for TPC-G, has also submitted similar entitlement of disallowed expenditure in respect of interest on working capital, based on the ATE Judgment in Appeal No. 137 (Judgment common to TPC-G, TPC- T and TPC-D). The summary of expenditure, which TPC is entitled to recover based on the ATE Judgment in respect of interest on working capital for TPC-G and TPC-T, for FY and FY , as submitted by TPC is given as under. Table: Interest on Working Capital entitlements for TPC-G and TPC-T (submitted by TPC) Rs Crore FY TPC-G TPC-T Total FY FY In its Judgment, while ruling on the matter, the ATE observed that the Commission should have assessed whether the internal accruals had to bear some costs themselves, and that the Commission could have looked into the source of such internal accruals or funds, and the cost of these funds could be higher or lower than the normative interest. The ATE has observed that the Commission was required to take the total picture into consideration while arriving at whether there was a gain or loss. Accordingly, for the recent year, i.e., FY , the Commission asked TPC to provide clarity regarding whether the working capital requirement has been met from the cash flows of TPC-G and/or cash flows from any other business. Further, TPC was also asked to submit the cash flow statement indicating as to how the working capital requirement has been met for TPC-G, TPC-T and TPC-D, respectively. In reply, TPC submitted that it has been operating on a common balance sheet for its MERC, Mumbai Page 90 of 167

91 Generation, Transmission, and Distribution businesses as well as for other business. Hence, TPC submitted that it would be extremely difficult to prepare a separate balance sheet for Generation, Transmission and Distribution, and separation of working capital is not possible. Further, TPC also submitted that it is not possible to prepare cash flow statements for the various businesses as the Company maintains a common balance sheet. TPC added that the expenditure presented to the Commission is under the principles of Regulatory Accounts comprising of elements such as normative loans, normative equity and normative return on equity, and hence, under such conditions only a normative cash flow can be prepared. In response to the query raised by the Commission in this regard, TPC submitted a Regulatory Cash flow for FY , with net cash inflow of Rs Crore, Rs (114.59) Crore and Rs (28.71) Crore for its TPC-G, TPC-T and TPC-D businesses. The regulatory cash flow statement submitted by TPC does not throw any further light on the matter, since it is based on normative values, which are in any case, being allowed. The issue is of actual working capital interest incurred by TPC. Further, since TPC has not been able to satisfactorily address the Commission's queries in this matter for FY , it is obvious that there is no substantiation of the actual working capital interest on funds used for meeting working capital requirement, for the previous years as well. The Commission is of the view that by implication, TPC has managed to meet its working capital requirements by its own operational efficiency, and has minimised the working capital requirement itself, and not actually relied on any funds to meet its working capital requirement. Hence, the Commission has allowed the entire working capital interest on normative basis in accordance with the MERC Tariff Regulations. Further, as per Regulation (d) of the MERC (Terms and Conditions of Tariff) Regulations, 2005, variation in working capital requirement is a controllable factor, the Commission rules that the entire normative working capital interest has to be considered as an efficiency gain, and the sharing of gains has to be computed in accordance with Regulation 19.1 of the MERC (Terms and Conditions of Tariff) Regulations, In view of the above, the Commission finds that there is no merit in TPC's claim to claw back the amount already passed on as efficiency gain to Distribution Utilities in the previous APR Orders. MERC, Mumbai Page 91 of 167

92 5.4 DEPRECIATION On the issue of depreciation expenditure for FY on the assets added during the year, the Commission, in its Order dated April 2, 2008, stipulated as follows: As regards to depreciation on the assets put in use during the year, the Commission has already dealt the issue in its MYT Order. In view of revised value of capitalisation as approved under previous paragraphs, the depreciation expenditure for FY and FY considering the depreciation on opening GFA is summarised... The ATE, in its Judgment in Appeal No. 137 of 2008, ruled as under: 31. In view of the provisions of the Tariff Regulations the Companies Act and the Accounting Standard-6, we find full justification and rationale in the contention of the appellant that proportionate depreciation has to be allowed even for part of the year when the assets have been put to use. The asset once put to use will be exposed to wear and tear which will not wait to depreciate till the start of the new financial year. We, therefore, allow the appeal in this view of the matter also. TPC submitted that therefore, it is entitled to recover the entire amount disallowed under this head for FY The summary of the impact of ATE Judgment in Appeal No. 137 of 2008 for depreciation, as submitted by TPC-G, is shown in the Table below: Table: Depreciation entitlements for TPC-G (submitted by TPG) (Rs. Crore) Depreciation TPC-G FY FY Actual depreciation expenses Allowed in Tariff Order dated Apr. 2, Allowed in Tariff Order dated May 28, 2009 Disallowed Quantum Amount of disallowed quantum to be now allowed due to ATE Judgment Further, TPC in its respective APR Petitions for FY for TPC-G, TPC-T and TPC-D, has also submitted similar entitlements of disallowed expenditure in respect of depreciation expenses on assets added during the year, based on the ATE Judgment MERC, Mumbai Page 92 of 167

93 in Appeal No. 137 (Judgment common to TPC-G, TPC-T and TPC-D). The summary of expenditure, which TPC is entitled to recover based on the ATE Judgment in respect of depreciation expenses on assets added during the year for TPC-G, TPC-T and TPC-D, for FY , FY and FY , as submitted by TPC is given as under. Table: Depreciation entitlements for TPC as a whole (submitted by TPC) Rs Crore FY TPC-G TPC-T TPC-D TPC FY FY FY In accordance with the ATE Judgment in Appeal No. 137 of 2008, the Commission has considered the depreciation expenses on the assets added during the year and accordingly approves the following additional allowable expenses on account of depreciation expenses for FY and FY , subject to the level of capitalisation being approved. Table: Depreciation entitlements for TPC as a whole (approved by Commission) Rs Crore FY TPC-G TPC-T TPC-D TPC FY FY FY The depreciation entitlement of TPC-G for FY on asset addition during the year has been considered under the Impact of asset related cost. Therefore, it has not been considered under Impact of ATE Judgment for FY DISALLOWANCES OF ENTITLEMENT ON GAINS ON ACCOUNT OF O&M EXPENDITURE DESPITE SIGNIFICANT INCREASE IN UNCONTROLLABLE EXPENSES On the issue of sharing of gains and losses for O&M expenses for FY , the Commission, in its APR Order dated April 2, 2008, stated: MERC, Mumbai Page 93 of 167

94 The Commission is of the view that the approach adopted by TPC for working out efficiency gains due to controllable factors is not appropriate. As per the provisions of Regulations, the increase in expenses due to uncontrollable expenses is to be allowed as pass through in tariffs, however, the base value of expenditure approved in the Order cannot be increased by adding increase in expenditure due to uncontrollable elements for determining gains/losses. The Commission is of the view that the overall actual O&M expenditure has to be compared with the O&M expenditure approved in the Order to determine the amount to be shared as a result of efficiency gains. The total amount of O&M expenditure allowed by the Commission for FY based on actual expenses including increase in expenses subject to prudence check works out to Rs Crore as against O&M expenses of Rs 255 Crore approved in the Order. Thus, the efficiency gain in O&M expenditure with respect to amount approved in the Tariff Order for FY works out to Rs 1.86 Crore, out of which 1/3 rd has been considered to be passed on to Distribution Licensees and 2/3 rd has been allowed to be retained by the Generating Company, i.e., TPC-G. The ATE, in its Judgment in Appeal No. 137 of 2008, stipulated: 24. MERC Regulation 18, set out below, provides that approved gain or loss to the licensee on account of uncontrollable factors shall be passed through tariff. Regulation 18: Mechanism for pass through of gains or losses on account of uncontrollable factors The approved aggregate gain or loss to the Generating Company or Licensee on account of uncontrollable factors shall be passed through as an adjustment in the tariff of the Generating Company or Licensee over such period as may be specified in the order of the Commission passed under Regulation 17.10; 18.2 Nothing contained in this Regulation 18 shall apply in respect of any gain or loss arising out of variations in the price of fuel, which shall be dealt with as specified in Regulation We find force in the arguments of the appellant that the uncontrollable factors do mean the factor which cannot be controlled and, therefore, any additional expenditure due to uncontrollable factors needs to be deemed as pass through. We therefore, allow the appeal in this view of the matter. MERC, Mumbai Page 94 of 167

95 Accordingly, TPC-G submitted the impact of ATE Judgment in Appeal No. 137 of 2008 on O&M expenses for FY and FY as shown in the Table below: Table: Entitlement of O&M Expenses for FY and FY submitted by TPC-G FY TPC-G Particulars Approved Actual Truing up Approved O&M Expenditure for FY Add: Entitlement of Brand Equity 7.29 Rs Crore Allowable Actual O&M Expenditure due to ATE Judgment Uncontrollable Expenditure Revision in approved O&M expenses due to pass through for uncontrollable expenses Entitlement of O&M expenses including efficiency gains with revised approved expenditure O&M expenses approved by MERC as entitlement Additional Entitlement of O&M expenses on account of ATE Judgment FY TPC-G Particulars Approved Actual Truing up Approved O&M Expenditure for FY Add: Entitlement of Brand Equity Allowable Actual O&M Expenditure due to ATE Judgment Revision in approved O&M expenses due to pass through for uncontrollable expenses Entitlement of O&M expenses including efficiency gains with revised approved expenditure MERC, Mumbai Page 95 of 167

96 Uncontrollable Expenditure Water Charges 2 Up gradation of IT Infrastructure 4 Total Entitlement on account of ATE Actual O&M expenses approved by MERC Additional Entitlement of O&M expenses on account of ATE Judgment In its Judgment, the ATE in its Judgment in Appeal No. 137 of 2008 observed that the additional expenditure due to uncontrollable factor should be pass through in the Tariff. The Commission is of the view that while carrying out the truing up for FY and FY in previous APR Orders, the Commission has already allowed actual O&M expenditure as submitted by TPC-G except the Brand Equity, which the Commission has allowed Rs Crore Rs Crore for FY and FY in this Order. Therefore, allowing O&M expenditure again on account of uncontrollable components for FY and FY will lead to double accounting of uncontrollable components of O&M expenditure. Accordingly, the Commission has not allowed the TPC-G s claim of O&M expenditure on account of uncontrollable components as proposed by TPC-G. 5.6 SUMMARY OF RECOVERABLE AMOUNT Based on the ATE Judgment in Appeal No. 137 of 2008 on various expenses, which were disallowed by the Commission while truing up for FY and FY , TPC-G submitted the summary of the amounts recoverable through tariff. TPC-G further submitted that the impact of trued up amount as approved by the Commission in the APR Orders, was considered in the determination of the tariff for FY and FY TPC-G submitted that as the impact of the ATE Judgment in Appeal No. 137 of 2008 is to be recovered in FY ; interest for 3 to 4 years would accrue and computed the interest based on the rate approved by the Commission for Working Capital interest. As regards the carrying cost on the impact of ATE Judgment in Appeal No 137 of 2008, the Commission has relied upon the ATE Judgment in Appeal No 137 of 2008 in the matter, which has not given any specific ruling regarding any carrying cost or interest cost on any element to be allowed. This is more so, since TPC had specifically prayed for interest being granted, which has not been granted by the ATE. The summary of the impact of the ATE Judgment in Appeal No 137 of 2008, as MERC, Mumbai Page 96 of 167

97 submitted by TPC and as approved by the Commission in this Order is shown in the following Table: Table: Summary of Recoverable amount Rs Crore Particulars FY FY TPC-G Approved TPC-G Approved Interest on Working Capital Brand Equity Efficiency Gains in O&M Expenditure Total IMPACT OF THE ATE JUDGMENT DATED MAY 12, 2008 IN APPEAL NO. 60 OF 2007 TPC-G submitted that it had presented the impact of ATE Judgment dated May 12, 2008 in the APR Petition for FY on various items for FY and FY The Commission then included the impact of the same in the APR Order dated May 28, TPC-G submitted that in the said Petition, TPC-G had inadvertently not included the impact of the VAT refund of Rs. 67 Crore pertaining to year FY , which was required to be returned to the Distribution Licensees. TPC-G submitted that the error was noticed during the audit of the Accounts subsequent to the Commission s APR Order dated May 28, Accordingly, TPC-G submitted the impact (in the form of Refund) on the various Distribution Licensees shown in the Table as under: Table: Entitlement of VAT Refund for FY (Rs Crore) VAT Refund % allocation TPC-G Approved by the Commission FY BEST 36% MERC, Mumbai Page 97 of 167

98 RInfra-D 41% TPC-D 23% Total In accordance with the ATE Judgment in Appeal No. 60 of 2007 in this regard, the Commission has approved the VAT refund of Rs. 67 Crore. 5.8 INCOME FROM CONTINGENCY RESERVE INVESTMENT TPC-G submitted that the Commission, in the APR Order dated May 28, 2009 for TPC-G, had bridged the recoveries of FY and FY through the drawals from Contingency Reserves to the extent of Rs 121 Crore. TPC-G submitted that such Contingency Reserves have been invested in specific securities and the income from such investments have been included under the Non Tariff Income and benefit of the same has been passed on to the consumers. TPC-G submitted that considering the fact that Contingency Reserves were utilised to meet the shortfall/gap of FY and FY and no interest was given by the Commission for such shortfall which is recovered in FY , it will only be appropriate to claim the income on such Contingency Reserves investment offered for reducing the ARR to the extent of Rs. 121 Crore of the investment. TPC-G submitted that the income of FY , FY , FY and FY would be entitled for such claims. The quantum of recovery on account of such interest as submitted by TPC-G is shown in the Table below: Table: by TPC-G) Share of Interest Income on Contingency Reserve Investment (submitted Year Total Reserve Reserve drawn by the Commissio n (Rs Crore) Income from contingency reserve (passed on to the consumers) Income reclaimed g in the filing FY FY FY FY Total MERC, Mumbai Page 98 of 167

99 The Commission is of the view that there is no merit in TPC's submission in this regard. The Commission utilised the Contingency Reserve to offset part of the revenue gap in FY , and till that time, TPC was earning interest on the investments made out of the contingency reserve. This interest income has rightly been passed on to the consumers in the respective years. Once the contingency reserve has been adjusted against the revenue gap, the Commission has not considered any interest income on that part of the contingency reserve. If TPC's contentions in this regard were to be accepted, it would amount to TPC being allowed to retain interest income out of investments made from contingency reserve funds, which have been contributed by the consumers. This would be unfair to the consumers. Therefore, the Commission does not approve the amount of Rs. 24 Crore claimed by TPC-G on account of income on Contingency reserve investment. 5.9 REDUCTION IN ANNUAL FIXED CHARGES FOR UNIT 7 As mentioned in section 3.1 the actual availability of Unit-7 during FY is 71.4% which is lower than the normative availability of 80% for recovery of full Annual Fixed Charges, therefore the Commission has reduced the Annual Fixed Charges for Unit 7 on pro-rata basis as shown in the Table below: Table: Estimation of reduced Annual Fixed Charge for Unit-7 (Rs. Crore) Particulars Amount Annual Fixed Charge approved in the MYT Order for FY Annual Fixed Charge at actual availability (71.40%) Reduction in Annual Fixed Charge on account of lower availability RECOVERY OF THE AMOUNT TPC-G submitted that during FY , TPC operated as an integrated Utility, and hence, the amount recoverable for FY would be recoverable from all the three Distribution Licensees, viz., TPC-D, BEST and RInfra-D, and proposed to recover the same in the ratio of total sales by TPC-G. MERC, Mumbai Page 99 of 167

100 For the amount pertaining to FY , TPC-G proposed to recover the recoverable amount in the proportion of the Fixed Charges of TPC-G allocated to each Utility. The summary of the amount recoverable from each Distribution Licensee as submitted by TPC-G is as shown in the Table below: Table: Recoverable amount from each Distribution Licensee as submitted by TPC- G (Rs Crore) Amt Recoverable on account of ATE Judgments Amt. Recoverable on account Sales (FY ) Amt. Recove r-able Fixed Costs (FY ) Amt. Recov erable of income in contingency reserve investments Amt. Refunda ble Total Licens ee MU % Rs. Crore Rs. Crore % Rs. Crore Rs. Crore Rs.Crore Rs. Crore BEST % % R Infra % % TPC-D % % Total Based on the total amount on account of impact of ATE Judgment in Appeal No 137 of 2008 on truing up for FY and , amount recoverable on account of income in contingency reserve investment, amount refundable on account of ATE Judgment dated May 12, 2008, the net amount to be recovered by TPC-G from Distribution Licensees for previous years is given in the following table: Table: Net amount to be recovered by TPC-G from Distribution licensees approved by the Commission Sl. No Particular Rs.Crore Total amount on account of impact of ATE A Judgment B Revenue Deficit for after truing up for FY C Impact of revised capitalisation in FY D Amount refundable on account of ATE Judgment dated May 12, 2008, (66.00) E Reduction in Annual Fixed Charge for Unit-7 (9.89) MERC, Mumbai Page 100 of 167

101 F Net amount to be recovered by TPC-G from Distribution Licensees (F=A+B+C-D-E) This amount of Rs Crore should be recovered by TPC-G from the three distribution licensees, i.e., RInfra-D, BEST and TPC-D in weighted average proportion to energy supplied by TPC to RInfra, BEST and TPC s retail consumers during FY and FY TPC-G should raise a separate bill to the three distribution licensees for recovering this amount in 7 equal instalments starting from September The summary of the amount recoverable from each Distribution Licensee as approved by the Commission is shown in the Table below: Table: Recoverable amount from each Distribution Licensee as approved by Commission (Rs Crore) Particulars FY Sales (MU) FY Sales (MU) Ratio of sales (%) Net amount Recoverable from Distribution Licensees BEST % 6.24 RInfra-D % 5.49 TPC-D % 3.58 Total % PERFORMANCE PARAMETERS 6.1 PERFORMANCE PARAMETERS Regulation 16.1 of the MERC Tariff Regulations stipulates: The Commission may stipulate a trajectory, which may cover one or more control periods, for certain variables having regard to the reorganization, restructuring and development of the electricity industry in the State. Provided that the variables for which a trajectory may be stipulated include, but are not limited to, generating station availability, station heat rate, transmission losses, distribution losses and collection efficiency. (emphasis added) MERC, Mumbai Page 101 of 167

102 The Commission, in its MYT Order for TPC-G, had approved the trajectory of following performance parameters: Availability Heat Rate Auxiliary Consumption 6.2 GENERATING STATIONS OF TPC The installed capacity of TPC s Generation Business is 2027 MW comprising 447 MW of hydel generation capacity and 1580 MW of thermal generation capacity, including the new Unit-8 of 250 MW at Trombay Thermal Station, which was commissioned on March 29, 2009, as against the original commissioning schedule of October TPC-G, in its Petition, also estimated the generation from Unit-8 along with its performance parameters and the applicable tariff for FY The station-wise and unit-wise break-up of total capacity of TPC s Generation Business is given in the following Table: Table: Summary of Existing Generation Capacity of TPC-G Station / Unit Installed Capacity (MW) Hydel Khopoli 72 Bhivpuri 75 Bhira 300 Sub-total 447 Thermal Unit Unit Unit Unit Unit 8 250* MERC, Mumbai Page 102 of 167

103 Station / Unit Installed Capacity (MW) Sub-total 1580 Total 2027 Note: * Out of 250 MW, only 150 MW is contracted within the Mumbai licence area 6.3 UNIT-WISE PERFORMANCE PARAMETERS AND TARIFF The Commission, in its MYT Order for TPC-G, had approved the performance of individual Units of Trombay Thermal Station rather than considering the entire Station as a whole, considering the fact that most of TPC-G s Units operate on multiple fuels, with the objective of bringing in more clarity in the tariff determination process. In the following paragraphs, the operational performance, fixed costs and variable costs of Units 4 to 7 of TPC-G have been discussed together, followed by a discussion on Unit Availability of TPC s Generating Stations The Commission, in its MYT Order, had considered the availability of Thermal Stations over the Control Period as projected by TPC for Unit-4, Unit-5, and Unit-6. However, for Unit-7, the Commission in its APR Order for FY in Case No. 111 of 2008, had considered the revised projections of availability of 92.20% for FY , after considering the varying gas availability. TPC-G, in its Petition, submitted the revised estimates of availability during FY based on the actual availability during the first six months and projections for the remaining six months of FY As the availability proposed by TPC-G for FY and FY for all the stations is higher than the normative availability, the Commission has approved the Availability as projected by TPC-G. The Unit-wise Availability as approved by the Commission in APR Order (for FY ), projected by TPC-G in the APR Petition, and considered by the Commission for FY and FY , is shown in the Table below: Table: Availability for FY and FY Plant FY FY APR Order Revised Estimate Approved Projected Approved Unit % 86.86% 86.86% 92.24% 92.24% Unit % 89.43% 89.43% 99.00% 99.00% Unit % 99.42% 99.42% 92.24% 92.24% Unit % 92.20% 92.20% 97.17% 97.17% MERC, Mumbai Page 103 of 167

104 6.3.2 Auxiliary Consumption TPC-G, in its Petition, submitted that the auxiliary consumption for hydro and thermal generation Units for FY is based on the actual auxiliary consumption for first six months and projections for the remaining six months of FY TPC-G has projected the auxiliary consumption for generating Units at Trombay Station for FY TPC-G submitted that the auxiliary consumption for the station as a whole is affected by the mix of generation from various Units. TPC-G further submitted that it is estimated that the overall auxiliary consumption for Trombay will be within the approved levels as specified by the Commission and the Auxiliary Consumption of all the Units is within the levels approved by the Commission, except for Unit 4. TPC-G stated that since Unit 4 is a 1965 vintage unit and it has been kept as a standby Unit in FY TPC-G submitted that though the Unit is kept as a stand-by, there are certain essential auxiliaries, which are required to be kept running or to be trial operated at regular intervals for keeping the Unit healthy. This leads to auxiliary consumption even when the Unit is not in service. TPC-G submitted that disproportionate rise in Unit 4 auxiliary consumption in the first six months is on account of limited utilisation of the Unit as per the need and environmental restrictions. TPC-G submitted that though the Unit was run for short intervals in April and June 2009, however, it has been constantly consuming auxiliary power throughout the duration. TPC-G requested the Commission to approve the revised auxiliary consumption of 11.84% for FY for Unit 4, considering the fact that Unit 4 was approved to be operated in the standby mode. As regards the auxiliary consumption for hydel stations, TPC-G submitted that the expected auxiliary consumption is 0.55% during FY as against 0.50% approved by the Commission. As TPC-G proposed the increase in auxiliary consumption for FY on account of commissioning of Closed Loop Generator Cooling system, the Commission asked TPC-G to submit the design rating of closed loop generator cooling system in kw or MW and also submit the approximate energy consumption in MU terms. In reply to the query asked by the Commission, TPC-G stated that the generator cooling system comprises of CLS fan, Vane Axial and Cooling tower fan with a total load of 28.5 kw and submitted that the approximate annual consumption of the same for 6 generators is about 1.44 MU based on 24 hour operation for 350 working days. Further, TPC-G submitted that the generator cooling system is fed from the station auxiliary bus and it does not have a separate dedicated MERC, Mumbai Page 104 of 167

105 metering system. TPC-G submitted that the benefits of the commissioning of generator cooling system will far outweigh the effect of increased auxiliary consumption as the closed system will prevent the ingress of moisture and water into the generator compartment, which used to result in frequent winding failures. In view of the above TPC-G, requested the Commission to kindly approve the higher auxiliary consumption for FY Though the auxiliary consumption as estimated by TPC-G for Unit-4 and for Hydro Generating Stations for FY is higher than the auxiliary consumption approved in the Order, the Commission in this Order has not revised the auxiliary consumption for FY , and the Commission will consider the actual auxiliary consumption for FY during truing up of performance for FY based on full year actual performance and prudence check. However, for FY , the Commission for hydro generating stations has considered the normative auxiliary consumption of 0.50%. The Commission will consider the actual auxiliary consumption for FY based on actuals at the time of truing up subject to prudence check. The summary of auxiliary consumption as approved in APR Order (for FY ), projected by TPC-G in the APR Petition, and considered by the Commission for FY and FY is shown in the Table below: Table: Auxiliary Consumption for FY and FY Plant FY FY APR Order Revised Estimate Approved Revised Estimate Approved Unit % 11.84% 8.00% 8.00% 8.00% Unit % 5.02% 5.50% 5.50% 5.50% Unit % 3.16% 3.50% 3.50% 3.50% Unit % 2.30% 2.75% 2.75% 2.75% Total Hydro 0.50% 0.55% 0.50% 0.56% 0.50% Heat Rate The Heat rate estimated by TPC-G for each of the Units for FY and FY and the rationale for the same is given below: Unit 4 Heat Rate MERC, Mumbai Page 105 of 167

106 As mentioned in the above paragraphs, TPC-G stated that Unit 4 is a 1965 vintage unit and has been operated as a stand-by Unit in FY This Unit is considered the last Unit in the merit order stack and operates only when any of the existing Units are under planned/forced outage. Apart from the merit order, strict environmental norms at Trombay also restricts the operation of the Unit. The Heat Rate of the Unit 4 in first six months for FY has been 2790 kcal/kwh due to limited operation of the Unit (16 MU) as it was primarily operated as a Standby Unit subsequent to the commissioning of Unit 8. Further, Unit 4 was also taken in service in the last six months for FY during the outage of Unit 8 to carry out necessary activities before Performance test of Unit 8. TPC-G requested the Commission to approve the Heat rate of 2683 kcal/kwh for FY and FY Unit 5 Heat Rate TPC-G submitted that in the APR Order for FY , the Commission had approved the Heat rate of 2499 kcal/kwh for FY as against 2555 kcal/kwh submitted by TPC-G. However, the estimated Heat rate for FY is 2565 kcal/kwh. TPC-G submitted that the increase in Heat rate is mainly due to the higher power generation using coal for reducing the overall fuel cost, which resulted in the lower boiler efficiency and hence, higher Heat rate of Unit 5. TPC-G further submitted that the degradation due to ageing of the Unit was also the primary reason for higher Heat rate. Unit 5 was commissioned in 1984 and will be completing 26 years of operational service. As a result of ageing, copper carry over has been observed from low pressure and high pressure feed water heaters into the turbine resulting in loss of efficiency of the turbine and hence, higher Heat rate of the Unit. TPC-G submitted that Unit 5 has a design Heat rate of 2370 kcal/kwh and is designed to fire Indian coal with moisture content of 8-10%. The stringent environment norms of Maharashtra Pollution Control Board (MPCB) compels firing of coal with 0.1 % sulphur and 2 % ash. The Indonesian coal presently fired on Unit 5 meets the environmental requirements as stipulated by MPCB. However, it contains high moisture content in the range of 24 % to 30 %. Regulation (b) iii and iv of MERC (Terms & Conditions of Tariff) Regulations, 2005, prescribes a correction factor of 1.04 (+ 4%) for Lignite as fuel with 30% moisture over the normative gross station Heat rates for coal based stations. The proportionate correction factor for 24 % moisture coal works out to 3.2%. MERC, Mumbai Page 106 of 167

107 TPC-G submitted that the combined effect of all the above mentioned factors leads to a correction of % over the design Heat rate of Unit 5. Considering the above aspects, TPC-G requested the Commission to approve the Heat Rate of 2565 kcal/kwh for FY and 2577 kcal/kwh for FY Unit 6 Heat Rate TPC-G submitted that in the MYT Order, the Commission had approved Heat rate of 2400 kcal/kwh for FY for Unit 6 operating on Oil. TPC-G submitted that it has opted for firing of RLNG in the interest of consumers by way of savings in fuel cost, and request the Commission to approve differential Heat rates for gas based generation and oil based generation. TPC-G further stated that the Heat rate norm approved by the Commission did not envisage gas firing in Unit 6 as there were issues regarding availability of gas. TPC-G submitted that in order to establish the impact of gas based firing on the Unit Heat rate, TPC had requested IIT Mumbai to conduct a study on Unit 6 boiler efficiency. The report submitted by IIT Mumbai has clearly indicated an adverse impact of 3% on the boiler efficiency as a result of gas firing increased from 15% to 50%. The primary reason for the increase in the Heat rate is attributed to higher hydrogen content in gas as compared to oil. The hydrogen leads to water formation in the boiler leading to higher heat losses. TPC-G requested the Commission to approve an increase of 3% in Heat Rate above 2400 kcal/kwh for FY for gas firing on Unit 6. For FY , TPC-G proposed the Heat Rate of 2472 kcal/kwh based on the estimated change in the boiler efficiency due to gas firing as against the Heat Rate of 2400 kcal /kwh approved by the Commission for the MYT period from FY to FY However, TPC-G vide letter dated June 25, 2010, made an additional submission for approval of higher Heat Rate of 2750 kcal/kwh instead of 2472 kcal/kwh submitted in the Petition. TPC-G further submitted that the gas being fired at present is markedly different from the gas supplied from ONGC s Bombay High platform, which is delivered at 20 o C. A Boiler requires a certain minimum superheat in the gas before it is fired in the furnace. The problem of hydrocarbon condensation arises partly due to the gas being comingled (mix of re-gassified LNG (RLNG) and natural gas) and also due to steep reduction in pressure (30 bar to 6 bar) that was never experienced in the gas supplied MERC, Mumbai Page 107 of 167

108 from ONGC terminal. TPC-G further submitted that for the Unit at full load on 100% natural gas, i.e., approximately 3.3 MMSCMD gas firing, the heat rate is expected to exceed 2600 kcal/kwh and TPC-G stated that there is an increase of about 17% in the Heat Rate of the Unit as compared to the Heat Rate of 2248 kcal/kwh with 100% Oil firing. The computation for the same is given in the following Table: Particulars Unit Turbine Heat Rate (kcal/kwh) 2057 Generation Efficiency (%) TG Heat Rate (kcal/kwh) 2087 Deterioration due to ageing of machines -6% 5% Actual TG Heat Rate (kcal/kwh) 2191 Boiler Efficiency (%) as per trial conducted under BHEL guidance 83 Unit Heat Rate (kcal/kwh) 2640 TPC-G submitted that based on their operational experience, the average Heat Rate with high amount of gas firing has exceeded 2700 kcal/kwh, which is further compounded when the Unit operates at low PLF. As there is an increase of more than 17%, TPC-G requested the Commission to approve the Heat Rate of 2750 kcal/kwh instead of 2472 kcal/kwh for 100% Gas firing in Unit 6. The Normative Heat Rate for the time period when the Unit is firing both Oil (2400 kcal/kwh) and Gas (2750 kcal/kwh) may be determined on the mix of the two fuels. Unit 7 Heat Rate TPC-G submitted that the estimated Heat rate for FY is 2105 kcal/kwh against the Heat rate of 1971 kcal/kwh approved by the Commission in the MYT Order. TPC-G submitted that the increase in Heat rate is mainly due to the inadequate availability of APM gas, which resulted in the under utilization of the CCPP. On an average, the availability of Gas is about 550 MT (0.8 MMSCMD) as against the requirement of about MT (1 1.1 MMSCMD). Thus, the average load on the Unit is around 170 MW as per the availability. At times, when the gas supplies are low, resorting to open cycle operation is the only option. All these uncontrollable MERC, Mumbai Page 108 of 167

109 conditions lead to higher Heat rates of the Unit. In view of the above submissions, TPC-G requested the Commission to allow separate norms for Heat rate for Open Cycle and Combined Cycle operation, respectively, for computation of gains and losses as described below: Particular Heat Rate (kcal/kwh) Open Cycle Operation 3300 Combined Cycle Operation 2000 The Commission would like to highlight that for FY , the revised Heat rate figures submitted by TPC-G are estimated figures based on actual performance during the first six months and estimated performance during the next six months of the year. The trajectory of performance parameters during the first Control Period was approved in the MYT Order considering the MERC Tariff Regulations, the past performance and based on the submissions made by TPC-G. The Commission agrees that there has been certain operational variations due to which the Heat rates during FY have increased as compared to Heat rates approved in MYT Order. However, the Commission is of the view that it may not be appropriate to modify the performance parameters approved for FY at this stage based on half year actual performance. However, the Commission will analyse the variation in actual performance during the entire year of FY based on justification provided by the TPC-G and take appropriate view on the matter including sharing of gains and losses during the truing-up exercise based on actual figures for the entire year. Thus, at this stage for FY , the Commission has not considered any revision in the Heat rate and has retained the Heat rate approved by the Commission in its MYT Order. For Unit-4, the Commission has considered the Heat rate of 2683 kcal/kwh for FY as estimated by TPC considering the partial load operations. For Unit -5, as discussed in Section 3, the CPRI has recommended a ten-year trajectory (from FY to FY ) of Heat rate and therefore, the Commission has considered the Heat rate of 2577 kcal/kwh recommended by CPRI for FY As regards the Heat rate for Unit-6 for FY , the Commission is of the view that all the expert agencies referred by TPC-G in its petition/submissions, for approval of higher Heat rate Indian Institute of Technology (IIT)-Bombay (the agency appointed by TPC-G ), Central Power Research Institute (CPRI) [the specialist Government body appointed by the Commission ] and BHEL (the OEM of the Boiler MERC, Mumbai Page 109 of 167

110 approached by TPC-G), have unanimously agreed that the problem regarding the constraints related to design aspect of the boiler, which is designed for gas having specified constitutional parameters and firing temperature., while RLNG differs from the originally specified gas on these counts. The expert agencies have also expressed that the problem may get mitigated to some extent, only if structural changes are made in the boiler as well as its control mechanism (e.g. alterations in the burner tilt mechanism), or if the gas to be fired is in conformity with that considered in the boiler design. Based on the power generation record of TPC-G over the past few months, and also based on the results of the tests conducted by CPRI jointly with TPC-G for Unit-6, the Commission observed that for around 50 : 50 (+/- 5%) firing proportion of Oil and RLNG, the unit is comfortably able to carry its rated load without exceeding any vital parameters. It is also observed that the test Heat Rate at these conditions is approximately is in the range of 2400 kcal/kwh to 2440 kcal/kwh. After conducting performance tests on the Unit at various proportions of Gas : Oil fuel, fired to the boiler, CPRI, the specialist Government agency appointed by the Commission to look into the problem, observed that: There is capacity constraint on the boiler due to low emissivity of gas flame (thereby reducing radiant heat pick-up and increasing convective pick up), low temperature of gas at the time of its firing due to Joule-Thomson cooling equipment and non-optimal mixing of gas and air. The net effects of these is oxidation zone propagation upwards as well as drawal of higher excess air. This results in limitation of boiler load to around 420 MW and calls for immediate re-design of burners, review of burner tilting and review of gas throttling mechanism before injection into boiler CPRI further summarised that: i) "Due to inherent composition of H2 Gas (present in RLNG), the Boiler efficiency decreases due to increased wet flue gas losses (latent heat + superheat in flue gas); ii) the turbo-generator Heat rate is unaffected by the fuel used in the boiler; iii) Extrapolation on the basis of the pure boiler efficiency and pure gas efficiency to intermediate values of oil-gas combinations do not give correct values. MERC, Mumbai Page 110 of 167

111 iv) There is also further decrease in boiler efficiency because the design gas of 81% Methane was envisaged but the actual gas contains over 95% Methane" Based on scrutiny of test records, the Commission has observed that at the firing of Oil to Gas in the proportion of 15 : 85 (+/- 5%). the load carried by the Unit comes down in the range of 393 MW to 444 MW due to h in boiler parameters and the test Heat rate observed at these conditions is approximately 2570 kcal/kwh. The Commission feels that the conditions cited above, wherein high amount of gas is fired and the oil firing is lower, cannot be considered as a normal operatingcondition as various restrictions in the form of vital Boiler parameters such as metal temperature force operation of the boiler at reduced loads. It is to be noted that the performance parameters specified by the Commission are always the annualised parameters at normal operating conditions of the Unit and the Utility is expected to optimise its operations at the specified levels. The Commission observes that based on the findings of the reports as mentioned above, approximately 50: 50 (+/- 5%) Gas to Fuel firing can be considered as an optimum fuel firing condition, and the Heat Rate measured at these conditions can be considered as the optimum achievable Heat rate for the Unit to deliver its rated load. On the basis of tests conducted and the observations made, the Commission specifies annual Heat rate of 2514 kcal/kwh, which has been specified for the above fuel firing condition for Trombay Unit 6 at full load and with present gas supplied by GAIL of approx. 95% - 96% Methane, until modifications / alterations as required are carried out by the Utility so that larger proportion of Gas firing can also be undertaken by the Utility at full load condition with improved efficiency. As regards the Heat rate of Unit-7, the Commission has approved the Heat rate of 1971 kcal/kwh for FY as approved for FY The Commission will consider the actual Heat rate for FY based on number of days of operation in open cycle and combined cycle and considering the approved Heat rate for combined cycle operations and normative Heat rate for open cycle operations while carrying out the truing up based on actual performance. MERC, Mumbai Page 111 of 167

112 The summary of Heat rate approved in APR Order (for FY ), projected by TPC-G in the APR Petition, and approved by the Commission for FY and FY is shown in the Table below: Table: Heat Rate (kcal/kwh) for FY and FY Plant FY FY APR Order Revised Estimate Approved Estimate Approved Unit Unit Unit Unit MERC, Mumbai Page 112 of 167

113 7 ANALYSIS OF ENERGY AVAILABILITY, ENERGY CHARGES AND ANNUAL FIXED CHARGES FOR FY AND FY TPC-G, in its APR Petition, submitted the performance for FY based on actual performance for the first half of the year, i.e., April to September 2009 and estimated performance for the second half of the year, i.e., October 2009 to March TPC-G submitted the comparison of each element of expenditure and revenue for FY with that approved by the Commission in its Order dated May 28, 2009 in Case No. 111 of TPC-G, in its Petition, along with the revised estimates of expenditure also provided the details of adjustments on account of sharing of gains and losses for FY TPC-G, in its Petition, mentioned that there exists an additional revenue requirement for FY largely on account of uncontrollable factors and sought the recovery of gap with carrying cost to be recovered from the three Distribution Licensees, viz., TPC-D, BEST and RInfra-D. TPC-G requested the Commission to provisionally true up expenses and revenue for FY including sharing of gains and losses and allow the same to be recovered from the three Distribution Licensees. The Commission will undertake the final truing up of the revenue requirement and Revenue for FY , once the actual expenses and revenue based on the Audited Accounts of TPC-G for FY are available. As regards the provisional truing up requirement for FY for TPC-G, the Commission is of the view that the provisional truing up for Generation Companies is not required to be undertaken as the Generation Companies are able to recover increase in fuel costs, which comprise the bulk of the expenses, through the FAC mechanism. Moreover, based on analysis of expenditure for FY , it is observed that overall total variation in other elements of expenditure except fuel cost, is not substantial, and there is also no requirement to change any principles/methodology. Accordingly, the Commission in this Order on APR for FY and determination of Tariff for FY , has not considered the provisional truing up of elements of the revenue requirement for FY However, before proceeding towards determination of tariff for FY , it is essential to assess the performance during FY based on half year actuals and revised estimates for second half of FY Accordingly, the revised estimate of performance of TPC-G during FY as compared to Commission s APR Order for TPC-G is discussed in the following paragraphs. MERC, Mumbai Page 113 of 167

114 7.1 ENERGY AVAILABILTIY Gross Generation during FY The summary of actual gross generation for FY , generation approved by the Commission in its APR Order for FY and revised estimates of generation in FY , as projected by TPC-G, is given in the following Table: Table: Gross Generation (MU) FY FY Particulars Actual APR Order Rev. Est. Hydro Unit Unit Unit Unit Total Thermal Total TPC Table: Unit-wise PLF for Thermal Stations (%) Particulars FY FY Actual Order Rev. Est. Unit 4 65% 6% 11% Unit 5 99% 91% 84% Unit 6 83% 89% 89% Unit 7 64% 90% 88% TPC-G, in its Petition, has projected lower thermal and hydro generation for FY vis-à-vis the quantum approved by the Commission in the APR Order for FY TPC-G submitted that the reduction in hydro generation is primarily resulting from compliance with the KWTA regulations. Further, the generation from Unit 5 is also expected to be lower than the approved generation on account of following reasons: Frequent boiler tube leaks in the goose neck area and water wall and platen super heaters till November 2009 requiring outages; Load restrictions due to condenser tube leakage; Scheduled outage of Unit 5 for 30 days in Jan As the overall variation in generation between the quantum approved by the Commission in the APR Order and actual generation for FY as submitted by TPC-G for FY is only around 2%, the Commission has not revised the MERC, Mumbai Page 114 of 167

115 quantum of gross generation for FY at this stage. The Commission will undertake the truing up of gross generation for FY based on actual performance for the entire year along with the reasons for variation in actual generation. 7.2 GROSS GENERATION AND ENERGY AVAILABILITY FROM TPC GENERATING STATIONS DURING FY Generation from Hydel Stations TPC-G submitted that the generation from the hydro stations is typically a function of both, plant availability and the quantum of water available in the catchment areas, and while the plant availability is a controllable factor, the water availability is not fully predictable. TPC-G submitted that considering the good monsoon conditions in previous years that led to higher hydro generation and to remain within the limit of Krishna Water Tribunal Award (KWTA), a generation of 1450 MU has been planned from hydro generating stations in FY The Commission has therefore, considered the approved gross generation of 1450 MU and net generation of 1443 MU from hydel stations as estimated by TPC-G in its Petition. The summary of net generation from hydel stations is given in the following Table: Table: Summary of Net Generation for FY (MU) TPC-G s Projection Approved Hydel Generation from Thermal Stations TPC-G, in its Petition, has projected the outage schedule for FY as follows: Unit 4 Unit 5 Unit 6 Unit 7 Unit 8 FY From 03-Jan Jan Aug Sep-10 To 02-Feb Jan Aug Sep-10 Purpose On Standby and would be run when necessary permissions are available Scheduled Outage Turbine Bearing Inspection, Boiler recertificat ion Annual Outage First schedule outage MERC, Mumbai Page 115 of 167

116 The summary of gross generation projected by TPC-G for each Unit of Trombay Thermal Station during FY (excluding Unit-8, which has been discussed separately) is given in the following Table: Table: Summary of Gross Generation and PLF for FY (TPC Projection) Unit Gross Generation (MU) PLF (%) Unit % Unit % Unit % Unit % The PLF projected by TPC-G in its APR Petition for all the Units during FY is 80%, except for Unit-4, which is a costly source of generation. Further, with the commissioning of Unit-8 of 250 MW, TPC-G proposed to reduce the generation from Unit-4 as Unit-4 is the highest cost unit in the merit order dispatch. The Commission has considered the gross generation level for Trombay thermal units as submitted by TPC-G in its APR Petition, however, the Commission will consider the actual generation achieved during FY at the time of truing up. The Commission directs TPC-G to abide by the SLDC s instructions for despatch schedule for the State as a whole in accordance with the merit order principles approved by the Commission from time to time. Considering the gross generation considered by the Commission and auxiliary consumption norms approved by the Commission in Section 4 of this Order, the projected net generation from TPC-G s generating stations is summarised in the following Table: Table: Summary of Net Generation for FY (MU) Unit Revised Projection Approved Unit Unit Unit Unit Sub-total Thermal Hydel MERC, Mumbai Page 116 of 167

117 Grand Total FUEL COSTS FOR FY TPC-G, in its Petition, has submitted that the total fuel cost for FY is estimated to be Rs Crore as against the estimate of Rs Crore approved by the Commission in the APR Order. The summary of fuel price in Rs/MT, calorific value and fuel price in Rs/Mkcal as submitted by TPC-G is given in the following Table: Table: Fuel Parameters Particulars APR Order H1 Actual Rev. Est. A. Fuel Price (Rs/MT) Gas Coal Fuel Oil B. Calorific Value (kcal/kg) Gas Coal Fuel Oil C. Fuel Price (Rs/Mkcal) Gas Coal Fuel Oil As the impact of variation in fuel prices is allowed as pass through under the FAC mechanism, the Commission has not considered any revision in fuel prices for FY in this Order. The Commission will undertake the final truing up for fuel costs based on actual fuel costs during the entire year, subject to prudence check. 7.4 FUEL COSTS FOR FY Fuel Price and Fuel Calorific Value TPC-G, in its Petition, submitted that it uses imported coal, gas and fuel oil as the primary fuels for its thermal generating Units. The prices of imported coal and oil are governed by the Fuel Supply/Transportation Agreements, while the gas price is under the Administered Price Mechanism and part of it is purchased under the various contracts that have been signed under commercial rates. TPC-G, in its Petition, submitted that it has projected the fuel prices during FY considering the factors affecting the fuel prices as discussed below: MERC, Mumbai Page 117 of 167

118 Oil TPC-G submitted that the oil market has seen extreme volatility in prices from a peak of USD 150 per barrel to a much lower price of USD 50 per barrel. Accordingly, based on the predictions, TPC-G has assumed a fuel oil price at Rs. 29,860/MT for FY Coal TPC, in its Petition, submitted that long-term contracts have been entered with PT Adaro, PT Samtan and other Indonesian coal sources for purchase of coal. TPC-G submitted that it has estimated the FOB prices for FY based on the following: (i) Current contract prices, (ii) Validity of the contracts, and (iii) International Coal market movement. Accordingly, TPC-G submitted that it has estimated the FOB price for Indonesian Coal as USD 52.4/MT. TPC-G submitted that it has entered into long-term freight contract for voyage from Indonesia to India at USD 25/MT. Hence, freight is estimated at USD 25/MT for FY TPC-G submitted that this contract is a fixed price contract and is not affected by the trends in pricing. For local logistics, TPC-G has entered into a contract for unloading, stevedoring, storing and transportation from the port of discharge to Trombay Thermal station. In addition, for unloading coal at Trombay Jetty, contract has been placed for dredging to enable smooth entry of ships to the jetty. Based on the above, TPC-G estimated the imported coal price for FY as Rs 4393/MT for FY Gas TPC-G, in its Petition, submitted that it has been looking for options to reduce its cost of generation by replacing its expensive oil based generation with gas. In this regard, TPC-G has entered into contracts/arrangement with Gas Authority of India Ltd (GAIL) for supply of gas from various sources at different points of time. The various arrangements are as given below. MERC, Mumbai Page 118 of 167

119 Administered Pricing Mechanism (APM) Gas TPC-G submitted that till FY , TPC-G had been able to source gas from GAIL under Administered Price Mechanism (APM) to meet its requirements for Unit 7. Trombay Unit 7 requires about MMSCMD for running the plant at full load. However, in view of the depleting reserves of the Bombay High fields, Trombay has been able to receive around 0.8 MMSCMD of APM gas which is entirely used in Unit 7. TPC-G submitted that it is important to take into consideration the revision of APM gas price as it has not been revised since July 2005 and is due for revision. TPC-G further added that the reports appearing in the media have indicated a definite upward revision in the pricing of APM gas, which will increase the cost of generation from Unit 7. The gas price for supply under this arrangement is however, much lower than the commercial rate. The expected rate for FY works out to Rs per MT. C-Series Gas TPC-G submitted that as per inputs received from GAIL, the quantum of gas from the Bombay High fields is expected to diminish due to depleting gas reserves and TPC-G will receive only about 0.5 MMCMD at the APM price levels. However, ONGC has developed old gas fields (C series) to augment the gas production and GAIL has indicated that it may be able to provide additional 0.5 MMSCMD from these fields ( C -Series) at a commercial price as agreed between GAIL and ONGC on an Annual basis. In addition, GAIL will be entitled to charge transmission charges (annually 3%), marketing margin (annually escalated at 5%) and applicable taxes and duties. TPC-G submitted that TPC has entered into an agreement with GAIL for sourcing a maximum quantum of 0.5 MMSCMD gas from the C-Series gas fields commencing from June 2009 for a period of 9 years with an annual revision of price based on the price agreement between ONGC and GAIL. Gas supplies under this contract are expected to start in Jan March 2010 and would prevent the loss of generation from Unit 7 on account of shortfall in APM gas supplies. The arrangement involves a take or pay obligation to off-take certain quantity of gas. Based on the assumptions made and the contract signed with GAIL, the price of C- Series Gas for FY MERC, Mumbai Page 119 of 167

120 works out to Rs. 16,406 per MT. A ratio of 50:50 is considered as the consumption for APM and C-Series gas respectively to arrive at a weighted average cost of Rs per MT for FY RLNG TPC-G submitted that with the recent possibility of availability of RLNG gas and gas from KG Basin, TPC-G has been in talks for commercial contracting of gas so as to reduce its cost of generation further by replacing its expensive oil based generation with gas based generation. TPC-G submitted that while the possibilities of sourcing KG basin gas are a bit distant for FY and FY , it has been possible to procure RLNG from June 2009 from GAIL. Currently, Tata Power is sourcing a maximum of 2 MMSCMD RLNG on short-term arrangement with monthly price variations. Further, TPC has entered into an agreement for about 1 MMSCMD RLNG with GAIL commencing from January 2010, which too has a Take or Pay Obligation. The pricing for the RLNG is based on a Pooled Pricing concept and is linked to price of Japanese Crude in the International market. The monthly FOB price is derived through a formula based on 12 month average price of Japanese Crude (JCC 12). Further, upper and lower price caps are applied based on 60 month average price of Japanese Crude (JCC 60). Making suitable assumptions about the drivers that determine the price, the rate of RLNG works out to be Rs per MBTU or Rs. 1,589 per kcal. The Commission has taken note on the efforts made by TPC-G with respect to arrangements of fuel procurement and endeavour to reduce the dependency on existing expensive oil based generation to gas based power generation. Based on submissions made by TPC-G, for Unit 7, the Commission has considered a blend of 50:50 of APM Gas and C-Series Gas to estimate the fuel price for FY The Commission obtained the prevalent fuel prices for the period from April 2009 to March The Commission has analysed the actual fuel prices during different periods of FY , as summarized in the following Table: Table : Summary of Actual Fuel Prices Particulars Petitioned H1 Actual (FY 10) Oct to March 10 MERC, Mumbai Page 120 of 167

121 A. Fuel Price (Rs/MT) Gas 11913* Coal Fuel Oil B. Calorific Value (kcal/kg) Gas Coal Fuel Oil * Blended Gas Price of APM Gas and C-Series Gas The summary of fuel prices as submitted by TPC-G is shown in the following Table: Month Price (Rs/Tonne) Coal LSHS Gas RLNG Oct Nov Dec Jan Feb Mar Average For FY , the Commission in accordance with the practice adopted in previous Tariff Orders, has considered the price and calorific value of fuel equivalent to average actual fuel price and calorific value for the latest quarter, i.e., January 2010 to March 2010 for coal, oil and gas prices. The summary of fuel prices and calorific value as projected by TPC-G and as considered by the Commission for FY is given in the Table below: Table : Summary of Fuel Prices for FY Particular Petition Approved A. Fuel Price (Rs/MT) Gas (Blended price of APM Gas and C-Series Gas) Coal Fuel Oil RLNG B. Calorific Value (kcal/kg) Gas Coal Fuel Oil RLNG MERC, Mumbai Page 121 of 167

122 7.4.2 Variable Cost of Generation and Rate of Energy Charge Based on performance parameters, i.e., Heat rate and auxiliary consumption approved for FY , and considering the fuel prices and fuel calorific value as discussed in above paragraphs, the variable cost of generation and rate of energy charge for each Unit of Trombay thermal generating station for FY as approved by the Commission is given in the Table below: Unit Table: Cost of Generation and Energy Charge approved for FY Fuel Fuel Price CV Heat Rate Aux. Cons. Cos of Gen Energy Charge Rs/Ton kcalal/kg kcal/kwh % Rs/kWh Rs/kWh Unit 4 LSHS % Unit 5 LSHS % Unit 5 Coal % Unit 6 RLNG * 3.50% Unit 6 LSHS * 3.50% Unit 7 Gas (Blended APM Gas and C-Series Gas) % * Heat Rate for Blended Fuel In the above Table, the cost of generation is computed as the total cost divided by the total gross generation, while the energy charge is computed as the total cost divided by the total net generation. The comparison of rate of energy charge as proposed in the Petition and as approved by the Commission for FY is given in the Table below: Table: Energy Charge for FY (Rs/kWh) Unit Fuel Petition Approved Unit 4 LSHS Unit 5 LSHS Unit 5 Coal Unit 6 RLNG Unit 6 LSHS Unit 7 Gas MERC, Mumbai Page 122 of 167

123 7.4.3 Summary of Total Fuel Costs Based on the approved net generation and rate of energy charge, the total fuel costs for FY are summarised in the following Table: Table: Total Fuel Costs for FY (Rs Crore) Unit Fuel Petition Approved Unit 4 Fuel Oil Unit 5 Fuel Oil Unit 5 Coal Unit 6 Gas Unit 6 Fuel Oil Unit 7 Gas Total Though fuel cost is considered as an uncontrollable expenditure, TPC-G should make all efforts to optimize the fuel cost, so that the burden on the distribution licensees to whom it sells power is minimized. Though variation in fuel prices is allowed as a pass through to consumers as part of the FAC mechanism, however, such FAC adjustments also need to be vetted by the Commission on post facto basis. Accordingly, the Commission directs TPC-G to submit the station-wise FAC details with all the necessary documents on quarterly basis for the Commission s approval. 7.5 O&M EXPENSES FOR FY TPC-G submitted that the revised O&M Expenditure for FY is estimated at Rs. 351 Crore (including the LCC cost of Rs Crore and Brand Equity of Rs Crore) as compared to Rs. 347 Crore approved in the APR Order, based on the actual O&M expenses for first half of FY and estimated O&M expenses for the remaining half of the year. TPC-G further submitted that the Commission while approving the said amount of Rs. 347 Crore had not considered the expenditure towards the Brand Equity Expenses. However, such expenses have now been allowed by the ATE, accordingly, the same should be considered as part of the approved expenditure and should be added to the base approved O&M expenditure of Rs. 347 Crore. As the variation in the revised projections of O&M expenses as submitted by TPC-G for FY is not significant, the Commission has not undertaken any provisional truing-up for O&M expenses for FY The Commission will undertake the final truing-up of O&M expenses for FY based on actual O&M expenses for the entire year and prudence check. MERC, Mumbai Page 123 of 167

124 7.6 O&M EXPENSES FOR FY TPC-G has estimated the O&M expenditure of Rs. 383 Crore for FY on account of inflationary increase in cost and considering the increase in expenses on account of increase in quantum and vintage of assets. Further TPC-G added that revision of salary and filling of pending vacancies is expected, which would result in increase in employee expenditure. For FY , the Commission has considered an increase of around 7.02% on account of inflation over the revised level of base O&M expenses as approved for FY , based on the increase in Wholesale Price Index (WPI) and Consumer Price Index (CPI). The Commission has considered the point to point inflation over WPI numbers (as per Office of Economic Advisor of Govt. of India) and CPI numbers for Industrial Workers (as per Labour Bureau, Government of India) for a period of 5 years, i.e., FY to FY ( upto March 2010), to smoothen the inflation curve. The Commission has considered a weight of 60% to WPI and 40% to CPI, based on the expected relationship with the cost drivers. Further, the Commission has also considered the impact of AS 15 (R) for FY at Rs. 24 Crore approved in previous Order. The summary of O&M expenses as projected by TPC-G and as approved by the Commission for FY is given in the following Table: Table: Summary of O&M Expenses for FY (Rs Crore) TPC-G Approved O&M Expenses CAPITAL EXPENDITURE AND CAPITALISATION Capital expenditure and capitalisation are two important variables that influence computation of various critical parameters such as depreciation, interest on long term debt and return on equity. Accordingly, variation between the approved values and actual performance during the Control Period needs to be evaluated carefully during Annual Performance Review. The capitalisation considered by the Commission in the APR Order and MYT Order, and the estimates submitted by TPC are given in the Table below: Table: Capitalisation projected by TPC for FY & FY Particulars FY FY (Rs. Crore) MERC, Mumbai Page 124 of 167

125 MYT Order APR Order Revised Estimate by TPC Estimate TPC Capitalisation by TPC-G, in its Petition, submitted that out of the total capitalisation of Rs Crore proposed in FY , an amount of Rs 63 Crore is on account of DPR schemes, which have been approved by the Commission. TPC-G has not proposed capitalisation of any new DPR scheme in FY The break-up of capitalisation in FY as submitted by TPC-G is as under: Table: Capitalisation projected by TPC for FY (Rs. Crore) Particulars Approved by the Commission Actual/ Estimated Non-DPR Schemes Carry Forward Schemes 101 New Schemes 63 HO & SS allocation including contingency provision 11 Total DPR Schemes Carry Forward Schemes 63 New Schemes Total 0 63 Total for TPC-G TPC-G submitted that for FY , it is expected to capitalise Rs. 63 Crore under the carry forward of DPR schemes. These schemes have either been approved or the cost benefit analysis has been submitted to the Commission for approval. Further, DPR schemes amounting to Rs Crore have been submitted for approval. TPC-G also submitted that Further, as directed by the hon ble Commission, Tata Power G has clubbed the non-dpr schemes into DPR schemes to an extent of Rs. 75 Crores in FY Similar practise would be adopted in future years as well. MERC, Mumbai Page 125 of 167

126 As regards to the Non- DPR schemes, an amount of Rs. 175 Crores is expected to be capitalised. Tata Power G would submit the cost benefit report in April 2010 (i.e after the year ending FY ) for the analysis by the Hon ble Commission. As regards capitalisation during FY , TPC-G proposed to capitalise DPR schemes worth Rs. 64 Crore (Rs. 20 Crore on new DPR Schemes) out of total capitalisation of Rs. 229 Crore. The break-up of capitalisation in FY as submitted by TPC-G is as under: Table: Capitalisation projected by TPC-G for FY (Rs. Crore) Particulars Actual/ Estimated Non-DPR Schemes Carry Forward Schemes 67 New Schemes 71 HO & SS allocation including contingency provision 27 Total 165 DPR Schemes Carry Forward Schemes 44 New Schemes 20 Total 64 Total Generation 229 The major DPR schemes projected to be capitalised in FY by TPC-G are: Dwarf compound wall at hydro Compound wall fencing on periphery of PH Automation & control instrument of hydro M/Cs. For the purpose of APR exercise for FY , the Commission has not considered the schemes for which DPR has been submitted by TPC-G, but are yet to be approved by the Commission. The DPR schemes which are yet to be approved by the MERC, Mumbai Page 126 of 167

127 Commission and have not been considered for capitalisation during FY are as under: 1. Bunds for Unit No. 5, 6 and 7 condenser cooling discharge water 2. Refurbishment of GT of Unit-7 in Flood Control & Peaking Unit 4. Installation of Gate at BTRP Intake for maximising BPSU pumping 5. Construction of stilling basin at Mulshi 6. Flood Control & Peaking at Khopoli 7. New Tunnel/ Lining at Khand-Bhivpuri Therefore, the Commission has considered capitalisation of Rs Crore for DPR Schemes as against Rs Crore submitted by TPC-G during FY As regards Non-DPR schemes, the Commission had issued a directive in this respect in the previous APR Order, restricting the capitalisation of such schemes to 20% of the capitalisation of DPR schemes during the year. The relevant extract of the Order is reproduced as under. In view of the above, as a general rule, the Commission has decided that the total capital expenditure and capitalisation on non-dpr schemes in any year should not exceed 20% of that for DPR schemes during that year. To achieve the purpose, the purported non-dpr schemes should be packaged into larger schemes by combining similar or related non-dpr schemes together and converted to DPR schemes, so that the in-principle approval of the Commission can be sought in accordance with the guidelines specified by the Commission. (Emphasis added) The Commission observed that TPC-G has submitted Non-DPR Schemes of Rs Crore in FY which is 279% % of DPR Schemes. The Commission has considered Non-DPR Schemes of Rs Crore (20% of approved DPR Schemes) in this APR Order. For FY , the Commission has not considered schemes for which DPR has been submitted by TPC-G, but are yet to be approved by the Commission. Such schemes are as under: 1. Unit No. 7 CW pump replacement with Kuboto make. 2. Replacement of 110 kv switchyard by GIS 3. Dwarf compound wall at hydro MERC, Mumbai Page 127 of 167

128 4. Compound wall fencing on periphery of PH 5. Up gradation of SFC & excitation-bpsu 6. Automation & Control int. of hydro M/Cs There are certain schemes for which DPR is yet to be submitted by TPC-G and hence such schemes are not considered by the Commission at this stage: 1. Replacement of 110 kv switchyard by GIS 2. Replacement of rotor & inner case of IPT Unit-5 3. Unit-5 Condenser life extension 4. Strengthening of Takwe- Wadeshwar Road 5. Unit-5 & 6 main turbine life extension 6. Low NOX Burners for Unit-4 Therefore, the Commission has considered capitalisation of DPR Schemes of Rs Crore. For Non-DPR Schemes in FY , the Commission has considered Non-DPR Schemes as 20% of approved DPR Schemes. The capitalisation as approved by the Commission for FY and FY is tabulated as under: Table: Approved capitalisation of TPC-G for FY & FY (Rs. Crore) Particulars FY FY TPC-G Approved TPC-G Approved Total Capitalisation after capping Non-DPR Schemes to % Total Schemes approved after capping DPR Schemes Non-DPR Schemes Non-DPR Schemes as a % of DPR Schemes % 20% 258% 20% MERC, Mumbai Page 128 of 167

129 7.8 DEPRECIATION The Commission, in its APR Order, had considered depreciation expenditure of Rs Crore for FY , which amounts to 1.93% of Opening level of Gross Fixed Assets (GFA) of TPC-G for FY The opening GFA was considered as Rs Crore for FY , and the depreciation rates were considered as prescribed under MERC (Terms and Conditions of Tariff) Regulations, TPC-G, under its APR Petition, submitted the revised estimate of depreciation expenditure for FY and FY as Rs 73 Crore and Rs 77 Crore, respectively. TPC-G in its petition submitted that depreciation for FY includes the depreciation on account of assets capitalised during the year as per ATE s ruling dated July 15, TPC-G, in its additional submissions, confirmed that depreciation has not been claimed beyond 90% of the asset value in line with the Tariff Regulations. The Commission observed that in the APR Formats annexed along with the Petition, TPC-G has calculated depreciation only on Opening GFA and not on assets addition during the year. However, in accordance with ATE Judgment, the Commission has considered the depreciation on Opening GFA as well as on the assets added during the year while approving the depreciation for FY and FY The Commission has applied the same percentage on the assets as submitted by TPC-G in the Petition. The asset-wise details of depreciation and percentage as submitted by TPC-G and as approved by the Commission are tabulated as under: Table: Approved Depreciation expenditure for FY & FY (Rs. Crore) Particulars FY FY APR Revised Approved Revised Approved Order Estimate by TPC Estimate by TPC Depreciation Opening GFA The Commission will undertake the truing up of Depreciation based on actual capitalisation during the entire year, subject to prudence check. MERC, Mumbai Page 129 of 167

130 7.9 INTEREST EXPENSES The Commission, in its APR Order dated May 28, 2009 had allowed interest expenses of Rs Crore for FY with a weighted average interest rate of around 9.0% p.a. TPC-G, in its APR Petition, submitted the revised estimate of interest expenses as Rs Crore and Rs Crore, at a weighted average interest rate of 11.06% and 14.16% for FY and FY , respectively. TPC-G submitted that in addition to the interest on normative loans for the previous years (70% of Capex of FY and 70% of capitalisation of FY and FY ), TPC has availed loans from IDFC (Rs. 450 Crore) and IDBI (Rs. 400 Crore) for funding the expenditure of FY , FY , FY and FY The balance capitalisation has been financed though normative debt. The Interest and Finance Charges for FY and FY have been computed for 70% of the expenditure to be capitalised in FY and FY TPC-G, in its Petition, submitted that it is considering refinancing one of its loans taken for corporate purpose and this new loan (IDBI Loan 2) to the extent of Rs. 300 Crore would be considered for financing the Capital Expenditure of Licensed area for FY TPC-G further submitted that in case the debt required to finance 70% of capitalisation for FY is more than actual loan, i.e., IDBI Loan-2, then a normative loan at % has been considered with repayment of 5 % every year. The summary of utilisation of IDBI Loan-2 for TPC-G, TPC-T, and TPC-D, as proposed by TPC is given below: Summary of financing of capitalisation for FY As regards financing of capitalisation for FY , TPC-G submitted that the entire existing loans have been utilised for funding of capital expenditure till FY MERC, Mumbai Page 130 of 167

131 and hence for FY , it has considered the funding of capitalisation through normative loans. Summary of financing of capitalisation for FY The Commission observed that TPC-G in the Petition has shown normative loan of Rs. 160 Crore (as shown in the table above) but due to the linking error in the APR Formats annexed along with the Petition, it has shown normative loan of Rs. 142 Crore. TPC-G has shown calculation of interest expenses as Rs Crore on loan drawal of Rs. 142 Crore during FY A. IDBI loan-1 TPC-G submitted that the terms of IDBI loan are the same as that submitted for FY in the truing up section. TPC-G further submitted that based on such terms, the interest rate applicable for such loan in FY and in FY is 11.50%. As regards IDBI Loan-1, the Commission has considered the terms and interest rate of 11.50% as approved in the truing up section of this Order for the purpose of provisional approval of net interest expenses for FY and FY B. IDFC TPC-G submitted that the terms of IDFC loan are the same as that submitted for FY in the truing up section. TPC-G further submitted that based on such terms, the interest rate is liable to vary over a period of time. Further, through a letter dated September 29, 2008, IDFC sought to reset the interest rate to 13% from September MERC, Mumbai Page 131 of 167