Before the MAHARASHTRA ELECTRICITY REGULATORY COMMISSION

Transcription

1 Before the MAHARASHTRA ELECTRICITY REGULATORY COMMISSION World Trade Centre, Centre No.1, 13th floor, Cuffe Parade, Mumbai Tel. No /65/69 Fax Website: Case No. 74 of 2006 In the matter of Approval of Reliance Energy Limited (REL) s Generation Business Annual Revenue Requirements for Control Period FY to FY Dr. Pramod Deo, Chairman Shri A. Velayutham, Member Shri S. B. Kulkarni, Member ORDER Dated: 18 th April, 2007 The Maharashtra Electricity Regulatory Commission (hereinafter referred to as Commission),in exercise of the powers vested in it under Section 61 and Section 62 of the Electricity Act, 2003 (hereinafter referred to as EA 2003) and all other powers enabling it in this behalf, and upon detailed scrutiny of various responses, objections, suggestions, comments made by consumers, Reliance Energy Ltd (REL) and other key stakeholders as part of their written submissions as well as during the public hearing, hereby issues this Order on the determination of the Annual Revenue Requirement (hereinafter referred to as ARR) for REL Generation Business.

2 Organisation of the Order This Order is broadly divided into five Sections. The first Chapter consists of a background and brief history of the ARR for the control period and the subsequent quasi-judicial process that it underwent. For the sake of convenience, a list of abbreviations with their expanded forms is also given. The second Chapter of the Order lists the Salient Features of the Order. The third Chapter of the Order details the various objections raised by the objectors in writing as well as during the Public Hearing before the Commission. The objections have been broadly categorized into Notice for Public Hearing, Norms of Operation, Coal Blending and Calorific Value, DTPS Performance and Separation of Accounts across all Functions of REL. The various objections have been summarized, followed by the response of REL-G and the ruling of the Commission on each of the issues. The fourth Chapter of the Order comprises the Commission's analysis and its decisions on REL-G's MYT ARR for control period FY to FY for its Generation Business. This Section comprises the details of the technical parameters of generation, various cost estimates for control period FY to FY of REL-Generation, and the Commission's reasoning for arriving at acceptable figures with reference to the figures given by REL-G. The Fifth Chapter of the Order specifies the tariff determination for REL-G. The Sixth Chapter of the Order specifies the applicability of the Order. Page 2 of 47

3 Abbreviations A&G Administrative and General ARR Annual Revenue Requirement ATE Appellate Tribunal of Electricity BSES BSES Limited now known as Reliance Energy Limited CAGR Compounded Annual Growth Rate CEA Central Electricity Authority Commission/ MERC Maharashtra Electricity Regulatory Commission CPI Consumer Price Index CPP Captive Power Plant Cr Crore Capex Capital Expenditure CWIP Capital Work In Progress DISCOMs Distribution Companies DPR Detailed Project Report DTPS Dahanu Thermal Power Station EA 2003 Electricity Act, 2003 GFA Gross Fixed Assets IDC Interest During Construction kv Kilo Volt kva Kilo-Volt Amperes IT Income Tax Page 3 of 47

4 kw Kilo Watt MT Metric Tonne MW Mega Watt MYT Multi Year Tariff NFA Net Fixed Assets O&M PLF PLR R&M Operation & Maintenance Plant Load Factor Prime Lending Rate Repair & Maintenance REL Reliance Energy Limited SBI SHR RoE State Bank of India Station Heat Rate Return on Equity Page 4 of 47

5 TABLE OF CONTENTS CHAPTER 1: BACKGROUND & BRIEF HISTORY... 8 A. BACKGROUND... 8 B. MULTI YEAR TARIFF FRAMEWORKS... 8 C. IMPACT OF ATE ORDER... 9 D. ADMISSION OF MYT PETITION FOR THE PERIOD FY TO FY E. PUBLIC HEARING PROCESS CHAPTER 2: SALIENT FEATURES OF THE ORDER CHAPTER 3: OBJECTIONS RECEIVED, REL-G S RESPONSE AND THE COMMISSION S RULING NOTICE FOR PUBLIC HEARING OBJECTION RECEIVED REL-G S RESPONSE COMMISSION S RULING NORMS OF OPERATION OBJECTIONS RECEIVED REL-G S RESPONSE COMMISSION S RULING COAL BLENDING & CALORIFIC VALUE OBJECTION RECEIVED REL-G S RESPONSE COMMISSION S RULING DTPS PERFORMANCE OBJECTION RECEIVED REL-G S RESPONSE COMMISSION S RULING SEPARATION OF ACCOUNTS FOR ALL FUNCTIONS OF REL OBJECTION RECEIVED REL-G S RESPONSE COMMISSION S RULING CHAPTER 4: DETERMINATION OF THE ARR FOR THE CONTROL PERIOD FY TO FY PRINCIPLES FOR DETERMINATION OF ARR FOR THE CONTROL PERIOD FY TO FY NORMS OF OPERATION GENERATION FROM DAHANU THERMAL POWER STATION AGGREGATE REVENUE REQUIREMENT Variable (Fuel) cost of Dahanu Thermal Power Station Station Heat Rate Specific Consumption of Primary and Secondary Fuel Fuel Price and Calorific Value Total Cost of Fuel Operation & Maintenance Expenses Capital Expenditure Depreciation and AAD Interest on Loans Page 5 of 47

6 5.5. Interest on working capital Return on Equity Income Tax Non Tariff Income Aggregate Revenue Requirement (ARR) Sharing of gains and losses CHAPTER 5: TARIFF DETERMINATION FOR REL-G ANNUAL FIXED CHARGES ENERGY CHARGE INCENTIVE CHAPTER 6: APPLICABILITY OF THE ORDER ANNEXURE 1 LIST OF PARTICIPANT OF TECHNICAL VALIDATION SESSION ANNEXURE 2 FORMAT FOR SCHEME WISE CAPITAL WORK IN PROGRESS DETAILS... 1 Page 6 of 47

7 Index of Tables TABLE 1 - SUMMARY OF ARR FOR THE CONTROL PERIOD FY TO FY TABLE 2 - OPERATIONAL NORMS AS PER LICENSEE SUBMISSIONS TABLE 3 - OPERATIONAL NORMS AS PER COMMISSIONS APPROVAL TABLE 4 NET GENERATION FOR THE CONTROL PERIOD TABLE 5 STATION HEAT RATE FOR THE CONTROL PERIOD TABLE 6 SPECIFIC CONSUMPTION FOR PRIMARY AND SECONDARY FUEL TABLE 7 FUEL PRICE AND CALORIFIC VALUE FOR THE CONTROL PERIOD TABLE 8 TOTAL COST OF FUEL FOR THE CONTROL PERIOD (RS CRORE) TABLE 9 VARIABLE COST OF GENERATION (RS/ KWH) TABLE 10 LICENSEE SUBMISSIONS OF O&M EXPENSES TABLE 11: O&M EXPENSES FOR CONTROL PERIOD TABLE 12: CAPITALISATION APPROVED FOR CONTROL PERIOD TABLE 13 DEPRECIATION FOR THE CONTROL PERIOD TABLE 14 INTEREST ON LONG TERM LOANS FOR CONTROL PERIOD TABLE 15 LICENSEE SUBMISSION ON INTEREST ON WORKING CAPITAL TABLE 16 COMMISSION APPROVED INTEREST ON WORKING CAPITAL FOR THE CONTROL PERIOD TABLE 17 ROE FOR THE CONTROL PERIOD TABLE 18 INCOME TAX FOR THE CONTROL PERIOD TABLE 19 NON TARIFF INCOME FOR THE CONTROL PERIOD TABLE 20 ARR FOR THE CONTROL PERIOD TABLE 21- SUMMARY OF ANNUAL FIXED CHARGES TABLE 22 ENERGY CHARGE Page 7 of 47

8 CHAPTER 1: BACKGROUND & BRIEF HISTORY A. Background This order relates to case 74 of 2006 filed by Reliance Energy Limited (REL) for ARR approval of the generation function for the first control period from FY to FY and tariff determination for FY REL (formerly known as Bombay Suburban Electricity Supply Company (BSES)) is a vertically integrated utility carrying out the functions of Generation, Transmission, Wheeling and Retail Supply of electricity in the suburbs of Mumbai. BSES was established in 1929 wherein the Government of Maharashtra (GoM) has provided them with a licence to supply electricity in the suburbs of Mumbai vide Bombay Suburban Electricity License, 1926 under section 3 of the erstwhile Indian Electricity Act, The license was renewed from time to time and at present the same license is in force till August 15, REL has a generating plant at Dahanu, Maharashtra (Dahanu Thermal power Station DTPS) of installed capacity of 2X250 MW for supply of power to the city of Mumbai in the REL License area. The power generated from DTPS is transmitted to Mumbai License area through a network of four 220 kv lines which is further stepped down to 33kV at three 220/33 kv at Aarey, Ghodbunder and Versova. B. Multi Year Tariff Frameworks Regulation 12.1 under Part C of Maharashtra Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulation, 2005, notified on August 26, 2005, directs the licensees in the State of Maharashtra to implement Multi Year Tariff (MYT) effective from April 1, Further, Regulation 14.1 under Part C of the above mentioned regulation states that The applicant shall submit a forecast of his aggregate revenue requirement and expected revenue from tariff and charges for the approval of the Commission for each financial year within a control period of five (5) financial years. Provided that for the first application made to the Commission under this Part, the control period shall be three (3) financial years i.e. April 1, 2006 to March 31, In line with the above, the Commission vide its letter November 14, 2005 had directed all the licensees in the State of Maharashtra to file the first MYT petition for the control period from Page 8 of 47

9 FY to FY by November 30, The Commission had also forwarded the Draft MYT Data Formats to all the licensees, vide its letter dated 21 st November 2005, and directed the utilities to submit their first Multi Year Tariff Petition. In response to the Commission s letters, all the Utilities requested the Commission to extend the time for submission of the first MYT application. The Commission, considering the requests made by the Utilities, vide its Order dated December 20, 2005 in the matter of Applicability of Multi Year Tariff Framework under Regulation 12 of Part C of the Maharashtra Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations, 2005 granted exemption to all the Utilities in Maharashtra from implementation of MYT framework starting from FY The Commission, in its Order, stated that the Commission would determine the tariff under a multi year tariff framework with effect from April 1, 2007 instead of April 1, 2006 as stipulated in MERC (Terms and Conditions of Tariff) Regulations, 2005 and accordingly, the first Control Period for MYT framework shall be the three financial years from April 1, 2007 to March 31, C. Impact of ATE Order The Commission in the Tariff Order dated October 3, 2006 decided on the revenue requirement of Reliance Energy Limited (REL) for FY In the same Order, the Commission has also dealt with the truing up of cost and revenues for FY and FY based on MERC (Terms and Conditions of Tariff) Regulation, 2005 and prudent norms. REL challenged this order of the Commission in the Appellate Tribunal for Electricity (ATE) on the issues of a) disallowance of Employee Expense and A&G Expense for FY , FY and FY , b) disallowance of R&M Expense for FY , disallowance of Income Tax for FY and FY , c) disallowance of distribution loss for FY , d) deviation in the operating norms of heat rate, auxiliary consumption and secondary oil consumption for generation and Page 9 of 47

10 e) reversal of rebate. The ATE has upheld the appeals of REL in its order dated April 4, 2007 for appeal no 251 of 2006 as given below: a) As per the appeal of REL, the ATE has upheld the appeal of REL regarding the allowance of the Employee expense, A&G expense and Income Tax based on actual audited figures amounting to Rs Cr, Rs Cr and Rs 101 Cr respectively as against Commission approved figure of Rs Cr, Rs Cr and Rs 7.64 Cr for FY b) Similarly, the ATE has upheld the appeal of REL regarding the allowance of the Employee expense, A&G expense and Income Tax based on actual audited figures amounting to Rs Cr, Rs Cr and Rs 74 Cr respectively as against Commission approved figure of Rs Cr, Rs Cr and Rs Cr for FY c) ATE also upheld the appeal of REL that the Commission should not deviate from the operating norms for station heat rate, auxiliary consumption and specific consumption of secondary fuel as specified in the MERC (Terms and Conditions of Tariff) Regulation, The Commission in line with the ATE order has approved the REL s MYT petition based on the principle and guideline of the MERC (Terms and Conditions of Tariff) Regulation, D. Admission of MYT Petition for the Period FY to FY As per the direction of the Commission, REL has filed the MYT Petition for generation business for the first control period FY and FY under affidavit on January 22, As per the MERC Tariff Regulations, Licensees should file application for the determination of Tariff, before the Commission, not less than 120 days before the date from when the tariff is intended to be made effective. The Commission had directed REL to submit the MYT Petition for the first Control Period by November 30, 2006, so that the Commission could issue the Order before the commencement of the next financial year, such that the revised tariffs are applicable for the entire financial year. Page 10 of 47

11 REL submitted its ARR and Multi Year Tariff Petition for the first Control period FY , FY and FY for its Generation Business on January 22, 2007, and requested the Commission to condone the delay in filing the MYT Petitions. REL is a vertically integrated utility. REL has filed the MYT petition for generation business based on the provisions in the MERC (Terms and Conditions of Tariff) Regulation, 2005 and MERC Tariff Order relating to REL for FY dated October 03, The Commission held a Technical Validation session in presence of authorised Consumer Representatives on February 13, 2007 where various discrepancies in the data were identified by the Commission and the Consumer Representatives. The Commission directed REL-G to submit the additional data and clarifications. The list of the participants is attached in Annexure 1. The Commission raised various queries during February 7, 2007 and February 13, 2007 through letters and s to ensure the completeness of the petition. REL-G has responded to the queries through its letter dated February 9, 2007, February 10, 2007 and February 12, After the submission of the information gaps as desired by the Commission, the Petition was accepted on February 21, 2007 vide letter No. MERC/ Case Nos. 73, 74 & 75of 2006/364. E. Public Hearing Process In accordance with Section 64 of the Electricity Act 2003, the Commission directed REL-G to publish its application in the prescribed abridged form and manner to ensure public participation in the process of ARR and Tariff Determination. As directed, REL-G had published the public notices in the following newspapers: a) Gujarat Samachar (Gujarathi) dated February 24, 2007 b) Mumbai Samachar (Gujarathi) dated February 24, 2007 c) Saamna (Marathi) dated February 24, 2007 d) Maharashtra Times (Marathi) dated February 25, 2007 e) Loksatta (Marathi) dated February 25, 2007 f) Times of India (English) dated February 25, 2007 Page 11 of 47

12 g) Indian Express (English) dated February 25, 2007 The hard copies of REL-G's MYT petitions, executive summary and the responses to the queries raised by the Commission before acceptance of the petition were made available for inspection/purchase to members of the public at REL's offices and consumer centers and the soft copies of the same were also made available in the REL ( and Commission ( website in downloadable format. The last date for filing written objections was March 19, The suggestions/objections, in English / Marathi, were filed in the form of affidavits. The Public Hearing covering all three functions of REL was conducted at Dinanath Mangeshkar Hall at Nehru Road, Ville Parle (E) Near Railway Station, Mumbai on March 21, 2007 at 11:00 hours. In the public hearing, there were around 5 objections out of which 2 objections raised by consumer representatives groups and the rest from individual consumers, addressing the issues concerning REL-Generation business. The main issues raised in objection were Notice for Public Hearing, Norms of Operation, Coal Blending and Calorific Value, DTPS Performance and Separation of Accounts across all Functions of REL, the details of which are presented in the subsequent sections. The Commission has ensured that the due process, contemplated under law to ensure transparency and public participation has been followed at every stage meticulously and adequate opportunity was given to all the persons concerned to file their say in the matter. Page 12 of 47

13 CHAPTER 2: SALIENT FEATURES OF THE ORDER 1. The Tariff determined by the Commission in this Order will be applicable with effect from the date of issue of this order i.e. April 18, 2007 and will remain in force until March 31, Further, the Commission rules that the REL-G will not be applying the tariff retrospectively as the delay in the issue of the order is because of the delay in filing of the petition by REL-G. However, the MYT framework and the principles that are enunciated in this Order would be applicable for a 3 year control period i.e. from April 1, 2007 to March 31, In this Order, the Commission has detailed out the principles for the determination of the various cost components of the Annual Revenue Requirement and Tariff, which would be followed during the Control Period. This being the first control period, and keeping in view the reservations in this regard by the (authorised) consumer representatives, the Commission has taken a cautious approach that should reflect the ground realities in terms of data quality, availability etc. 3. The Commission has projected the cost components of the ARR for all the three years of the Control Period. However, the figures of capital cost are indicative given the current situation that the DPRs for all the capital expenditure schemes have not been submitted and also the investments cannot be approved for the entire control period owing to the present mechanism of DPR approvals, timing and data issues. 4. The key underlying basis for projection of the various cost components of the ARR are as follows: a. The norms as per the MERC (Terms and Conditions of Tariff), Regulation, 2005 for heat rate, auxiliary consumption, specific consumption for secondary fuel and transit loss has been considered for the purpose of this Order. b. The actual fuel cost for April, 2006 to September, 2006 has been considered for the 3 years of the control period. c. The Commission has considered only non-dpr schemes for approval towards capital expenditure for the control period in the ARR, as no DPR schemes have been approved in principle for the control period due to lack of submission of DPRs by the licensee and lack of data. Any further capital expenditure will be considered during Page 13 of 47

14 the annual performance reviews after submission of DPRs for the proposed schemes and only after the approval by the Commission. d. The Operation and Maintenance expenses have been projected based on the provisions of the MERC (Terms and Conditions of Tariff) Regulation, 2005 and the inflation rate considered for projecting the cost during the control period is in line with the CERC regulation i.e. a composite index of WPI and CPI in the ratio of 60:40 respectively. e. The normative interest rate for long term loans is assumed at 8% for the control period as per the last tariff order dated October 3, f. The working capital is computed as per the norms laid down in MERC (Terms and Conditions of Tariff) Regulation, The normative interest on the working capital is assumed at 11.50% i.e. the short term State Bank of India Prime Lending Rate (PLR). g. The Commission computed tax as per the provision of Income Tax Act, 1961 considering REL-G as a stand alone entity. The MAT rate of 10% is applied with surcharge of 10% and education cess of 3%. The same will be trued up based on the proportion of the actual tax paid by REL-G. h. The Non-tariff income is considered the same throughout the control period and is the same amount as approved by Commission in its last tariff order dated October 3, The Tariff for each year of the Control Period will be determined at the beginning of the each financial year. 6. The summary of the various cost component of the ARR is tabulated below: Page 14 of 47

15 Table 1 - Summary of ARR for the Control Period FY to FY (Rs Crore) FY FY FY FY Tariff Order Fuel Cost O&M Expenses Depreciation AAD Interest on Long-term Loan Capital Interest on Working Capital Income Tax Total Revenue Expenditure Return on Equity Capital Incentive on Availability Less: Non Tariff Income Aggregate Revenue Requirement Page 15 of 47

16 CHAPTER 3: OBJECTIONS RECEIVED, REL-G S RESPONSE AND THE COMMISSION S RULING 1 Notice for Public Hearing 1.1 Objection Received Polysteel India and other consumer representatives stated that the tariff application should be made 120 days in advance of the date from which tariff is to be applied and if in case a utility is delaying the process, it should be made accountable to explain reasons for such delay. Polysteel India also submitted that enough time, as provided for in the Commission s regulations, was not given to the public to study the application. In addition there should be a change in the procedure of filing responses and the current cumbersome procedure should be done away with. Polysteel India requested the Commission to allow response filing procedure. Teleflo Instrument Co Pvt. Ltd. urged the Commission to postpone the entire process since very less time was given to public to analyse the applications. 1.2 REL-G s Response REL replied that the MYT Petition of the Generation business for the control period FY to FY was filed on January 22, 2006 as against the prescribed date of November 30, 2005 as per Regulations. Further, they requested the Commission to condone the delay. 1.3 Commission s Ruling As per the EA 2003, the Commission is required to issue the Tariff Order within 120 days of receipt of the Petition. Hence, the Commission has stipulated November 30, 2006 as the last date for submission of the ARR and Tariff Petitions to effect the tariff from April 1, The Commission has been insisting on timely submission of the ARR and MYT Petitions by the licensees, so that the Orders can be issued before the commencement of the next financial year, and can be operative for the complete financial year. The Commission is conscious about the time to be given to the consumers to file their comments so as to ensure the transparency in the process. Thus the Commission insisted the licensee to submit the petition in time. However, the Utilities have been delaying the Page 16 of 47

17 submission of the Petitions on some grounds or the other, which is being viewed seriously by the Commission. REL-G submitted its MYT petition on January 22, Keeping in mind the above provision and delay in submission by the license, the Commission felt that three weeks time will be adequate for receiving objections from the public. Wherever possible, the Commission does give additional time to the public for submission of their comments and suggestions. However, given the urgency of this matter, and the need for issuing this Order as soon as possible the Commission could not give additional time for submission of comments and suggestions. 2 Norms of Operation 2.1 Objections received Prayas submitted that REL has used the normative heat rate of 2500 kcal/kwh instead of the MERC approved norms of 2350 kcal/kwh. Prayas urged the Commission to take into consideration the historical performance, which shows that the Heat Rate have been better than the norm of 2500kCal/kWh given in the regulation. 2.2 REL-G s Response REL-G reiterated that as mentioned in its MYT Petition, they request the Commission to consider the Norms for Availability, Auxiliary Energy Consumption, Station Heat Rate, Secondary Fuel Oil Consumption and Transit Loss in line with the MERC (Terms and Conditions of Tariff) Regulation, 2005 and not the revised norms as per the last tariff order dated October 3, Further, REL-G also stated that the as per the regulation 26.2 of the MERC (Terms and Conditions of Tariff) Regulation, 2005, the Commission may deviate from the norms only for the underperforming utilities so as to allow them time to bridge the huge gap by improving performance and for better performing utilities. REL-G also stated that the norms should not be utility specific but should be common for all utilities based common benchmarks and not based on the utility wise historical performance. Standard norms across generating station will also ensure levy of equitable incentive / penalties across all generating stations. Page 17 of 47

18 2.3 Commission s Ruling As per the Appellate Tribunal for Electricity Order dated April 4, 2007, MERC is considering the norms for heat rate, auxiliary consumption and secondary oil consumption as prescribed by MERC in Regulation 33 of MERC (Term and Conditions of Tariff), Regulation, 2005 and not the revised norms as per the Order dated October 3, Coal Blending & Calorific Value 3.1 Objection Received Prayas and Mumbai Grahak panchayat (MGP) also submitted that REL should use blend of Indian raw coal with imported coal, this would result in net saving of Rs.40 Crore every year. Prayas submitted that the after the installation of FGD, environmental risk of using raw coal will reduce significantly, hence is Feasible for the company to use the blend of Indian raw coal with imported coal. Prayas also requested the Commission to revise the specified coal costs and calorific values in the Tariff Regulations and to disallow the excess fuel costs on account of imprudent fuel choice and reduce the ARR accordingly. 3.2 REL-G s Response REL G responded that it is not possible to increase the consumption of the imported coal due technical reasons and the design and specification of the plant and machinery. Though, the calorific value of the imported coal is higher than the raw coal, the use of imported coal is limited to the extent of 80% of the total coal consumption due to the specifications of the plant and machinery. 3.3 Commission s Ruling While the Commission agrees with the response of REL-G that the blending ratio of coal is dependent on the design and specification of the plant and machinery but REL-G should try to maximise the use of Indian raw coal as much as possible without affecting the plant and machinery. Page 18 of 47

19 4 DTPS performance 4.1 Objection Received Vel Induction Hardenings submitted that the performance of DTPS has been deteriorating over the years, which is observed from the increasing trend in parameters like heat rate and auxiliary fuel consumption. This is despite a significant increase in R&M expenses and Capital Investment, apart from the use of improved quality of coal. REL is running obsolete technology and it should explain what steps the company is taking to avoid obsolescence. Vel Induction Hardenings stated that REL has not taken due care of environmental concerns in running the Dahanu plant as is evident from newspaper articles regarding installation of FGD at the plant. 4.2 REL-G s Response REL-G responded that the heat rate and auxiliary consumption have been considered based on the MERC (Terms and Conditions of Tariff) Regulation, 2005 for the purpose of projection and they are not the actual values. Further, REL mentioned that they are abiding by all the prevailing environmental protection guidelines and thus they are also installing a FGD as advised by environmental regulatory authorities. 4.3 Commission s Ruling The Commission rules that as per the decision of the ATE Order dated April 4, 2007, the norms as per the MERC (Terms and Conditions of Tariff) Regulation, 2005 will be considered while determining the ARR of REL-G. 5 Separation of Accounts for all Functions of REL 5.1 Objection Received Many objectors pointed out that REL need to maintain separate accounts for REL Mumbai Licensee areas and other business like BSES Yamuna, BSES Orissa etc. Further they should also maintain separate accounts for the three function of REL i.e. Generation, Transmission and Distribution. It was also mentioned that this accounts should be readily available to the consumers so that the transparency in the system is maintained. Page 19 of 47

20 5.2 REL-G s Response REL responded that they maintain separate accounts for REL Mumbai License area and other business of REL like BSES Yamuna, BSES Orissa etc. Further, they stated that this also can be made available to the consumers. However, REL is not maintaining separate accounts for different functions i.e. Generation, Transmission and Distribution. 5.3 Commission s Ruling The Commission opines that it is important for REL to maintain separate accounts for its different function i.e. Generation, Transmission and Distribution in a transparent manner. Further, the Commission directs REL to start maintaining distinct regulatory accounts for each of the functions as they are separate licensed businesses. The Commission also intends to prescribe formats for the same from accounting perspective. Page 20 of 47

21 CHAPTER 4: DETERMINATION OF THE ARR FOR THE CONTROL PERIOD FY TO FY Principles for Determination of ARR for the Control Period FY to FY REL is a vertically integrated utility involved in Generation, Transmission and Distribution business. However as stipulated by the Commission REL has submitted the MYT petition for the Control Period FY to FY separately for all the three businesses for approval to the Commission. The principle adopted for the implementation of the MYT framework and the approval of the MYT petition is based on the MERC (Terms and Condition of Tariff) Regulation, In this Order, the Commission has analyzed the REL-Generation MYT Petition for the approval of the same. 2. Norms of Operation REL-G in its MYT Petition has requested the Commission to consider the Norms for Availability, Auxiliary Energy Consumption, Station Heat Rate, Secondary Fuel Oil Consumption and Transit Loss in line with the MERC (Terms and Conditions of Tariff) Regulation, 2005 and not the revised norms as per the last tariff order dated October 3, Further, REL-G also stated that the as per the regulation 26.2 of the MERC (Terms and Conditions of Tariff) Regulation, 2005, the Commission may deviate from the norms only for the underperforming utilities so as to allow them time to bridge the huge gap by improving performance and not for the better performing utilities. REL-G also stated that the norms should not be utility specific but should be common for all utilities based on common benchmarks and not based on the utility wise historical performance. Standard norms across generating stations will also ensure levy of equitable incentive / penalties across all generating stations. REL at the same time has filed with the Appellate Tribunal for Electricity that MERC be directed to consider the norms for heat rate, auxiliary consumption and secondary oil consumption as prescribed by MERC in Regulation 33 of Tariff Regulations, 2005 and not the revised norms as per the Order dated October 3, In its MYT filing, REL-G has projected its generation based on the CERC / MERC Norms and has prayed the Commission to adopt the same while considering the MYT ARR. Page 21 of 47

22 REL G in its MYT Petition has submitted the following norms for Availability, Auxiliary Energy Consumption, Gross Station Heat Rate, Secondary Fuel Oil Consumption and Transit Loss. Table 2 - Operational Norms as per licensee submissions Particulars FY FY FY Availability (%) 94.25% 94.25% 94.25% Auxiliary Energy Consumption (%) 8.5% 8.5% 8.5% Gross Station Heat Rate (Kcal / kwh) Secondary Fuel Oil Consumption Ml / kwh Transit Loss (%) 0.8% 0.8% 0.8% Going by the decision of the Appellate Tribunal, in paragraph 57 of their order dated April 4, 2007 with respect to Appeal No. 251 of 2006, the Commission has ruled that the operating norms pertaining to gross station heat rate, auxiliary consumption and secondary oil consumption shall be considered as per the MERC norms specified in the MERC (Terms and Conditions of Tariff) Regulations, On similar lines Commission rules that the norms for Transit loss shall be applicable as per the MERC (Terms and Conditions of Tariff), Regulation, To determine the availability of DTPS the commission has analysed the planned and forced outages as estimated by REL-G. REL in its MYT petition has considered the planned outage 25 days for minor overhaul of Unit I and 10 days for boiler license renewal of Unit II. Further they have considered a forced outage of 7 days which includes 3 day each for boiler tube leakage and 0.5 days each for tripping for both the units. The Commission observed that REL had the planned and forced outage in similar line in the past and thus approves the same. Based on this the availability for REL works out to be 94.25%. The Commission approved figures for the above parameters are as follows: Page 22 of 47

23 Table 3 - Operational Norms as per Commissions approval Particulars FY FY FY Availability (%) Auxiliary Energy Consumption (%) 8.5% 8.5% 8.5% Gross Station Heat Rate (Kcal / kwh) Secondary Fuel Oil Consumption Ml / kwh Transit Loss (%) 0.8% 0.8% 0.8% 3. Generation from Dahanu Thermal Power Station REL-G in its petition has computed the net generation based on 94.25% and auxiliary consumption of 8.5%. Further, REL-G has also assumed the auxiliary consumption for FGD based on the supplier specifications. The Commission also approves the same level of availability and auxiliary consumption. Thus, the Gross generation, Auxiliary Consumption and Net Generation as per the licensee s submission and Commission Approval is tabulated below: Table 4 Net Generation for the control period (In MUs) Particulars FY FY FY Licensee Submission Gross Generation Auxiliary Consumption Auxiliary Consumption due to FGD Net Generation Commission Approval Gross Generation Auxiliary Consumption Auxiliary Consumption due to FGD Net Generation Page 23 of 47

24 4. Aggregate Revenue Requirement 4.1. Variable (Fuel) cost of Dahanu Thermal Power Station The variable cost of fuel is depended on the following parameters: Station Heat Rate Specific Consumption for Secondary Oil Calorific Value of Fuel Landed Cost of Fuel Blending Ratio of Fuel Station Heat Rate REL-G in its submission has requested the Commission to consider the Station heat rate in line with the MERC (Term and Conditions of Tariff) Regulation, Further, the ATE through its Order dated April 4, 2007, upheld the request of REL-G to consider the norms as per the MERC (Term and Conditions of Tariff) Regulation, 2005 and not as per the revised norms as prescribed by the Commission in the last Tariff Order dated October 3, Thus, the Commission has considered the norms as per the MERC (Term and Conditions of Tariff) Regulation, The station heat rate as per the licensee submission and the Commission Approval is tabulated below: Table 5 Station Heat Rate for the control period Particulars FY FY FY Licensee Submission Station Heat Rate (kcal/ kwh) Commission Approval Station Heat Rate (kcal/ kwh) Page 24 of 47

25 Specific Consumption of Primary and Secondary Fuel REL in its submission has considered that the specific consumption for secondary fuel for the 3 year of the control period at 0.25 Ml/ kwh. ATE through its Order dated April 4, 2007 has upheld the appeal of REL-G to consider the Norms as per the MERC (Term and Conditions of Tariff) Regulation, Thus, the Commission has considered a specific consumption for secondary fuel for the 3 year of the control period of 2.0 Ml/ kwh in line with the MERC (Term and Conditions of Tariff) Regulation, The specific consumption of coal is computed based on the station heat rate contributed by coal i.e. the total station heat rate minus the station heat rate contributed by the secondary oil and the calorific value of the coal as specified above. The specific consumption for primary and secondary fuel as per licensee submission and the Commission Approval is tabulated below: Table 6 Specific Consumption for primary and secondary fuel Particulars FY FY FY Licensee Submission Specific Consumption for Primary Fuel (Kg / kwh) Washed Coal Imported Coal Specific Consumption for Secondary Fuel (Ml / kwh) HFO Heavy Furnace Oil LDO Light Diesel Oil Commission Approval Specific Consumption for Primary Fuel (Kg / kwh) Washed Coal Imported Coal Specific Consumption for Secondary Fuel (Ml / kwh) HFO Heavy Furnace Oil LDO Light Diesel Oil Page 25 of 47

26 Fuel Price and Calorific Value REL-G in its MYT Petition has submitted that calorific value of primary and secondary, fuel price (Rs / MT) for primary and secondary fuel has been considered at the same level as per the last tariff order dated October 3, The Commission has considered the latest price of the fuel as well as the calorific value based on the actuals for April, 2006 to September Thus, the Fuel Price in terms of Rs/Mt and Calorific value for primary and secondary fuel as per the licensee s submission and Commission Approval is tabulated below Page 26 of 47

27 Table 7 Fuel Price and calorific value for the control period Particulars FY FY FY Licensee Submission Primary Fuel Fuel Price (Rs / MT) Washed Coal Imported Coal Calorific Value (kcal / kg) Washed Coal Imported Coal Secondary Fuel Calorific Value (kcal / kg) HFO - Heavy Furnace Oil LDO - Light Diesel Oil Fuel Price (Rs / MT) HFO - Heavy Furnace Oil LDO - Light Diesel Oil Commission s Approval Primary Fuel Fuel Price (Rs / MT) Washed Coal Imported Coal Calorific Value (kcal / kg) Washed Coal Imported Coal Secondary Fuel Fuel Price (Rs / MT) HFO - Heavy Furnace Oil LDO - Light Diesel Oil Calorific Value (kcal / kg) HFO - Heavy Furnace Oil LDO - Light Diesel Oil Total Cost of Fuel The Commission has calculated the total cost of the fuel based on the approved norms for heat rate and auxiliary consumption for FY While doing these calculations the Commission has considered the fuel prices and fuel calorific values as discussed in above sections. In addition, REL-G in its petition has considered Other charges and adjustment such as cost for railway staff etc, the Commission has approved the same. The total generation cost as computed by the Commission is tabulated below: Page 27 of 47

28 Table 8 Total Cost of fuel for the control period (Rs Crore) Particulars FY FY FY Total Cost of Washed Coal Total Cost of Imported Coal Total Cost of HFO Heavy Furnace Oil Total Cost LDO Light Diesel Oil Total Cost of Fuel Total other Charges and Adjustment Total Cost of Generation The Variable cost of generation per unit at generation terminal and ex-bus is tabulated below: Table 9 Variable Cost of Generation (Rs/ kwh) Particulars FY FY FY Cost of Generation at Generation Terminal Cost of Generation ex-bus Operation & Maintenance Expenses REL-G in its MYT Petition has filed for Employee Expenses, Administrative & General Expenses and Repairs & Maintenance expenses separately. REL-G in its petition has projected each of the heads mentioned above for the control period based on inflation and salary revision. The same has been detailed below: Employee Expenses REL-G in its MYT petition has stated that for exceeding consumer s expectations and compliance of regulatory requirements, REL-G has strengthened its human Resource in terms Page 28 of 47

29 of skills and proficiency. Further REL-G also has stated that the impact of expected salary revision for staff and officers was proposed in the ARR petition for FY and thus an additional provision of 23% was made towards the salary revision as the same is as per the past trend of agreements with the Union. REL-G has expressed that it is difficult for any utility at the present juncture to retain employees without providing for reasonable revision in the wages appropriately rewarding them to maintain the performance standards as compared to similar utilities in the business. Commission would like to reiterate its opinion that in a regulated and cost-plus environment, employee expenses due to the salary revision cannot be considered as pass through to the consumer and the Utility should get efficiency gains in return for wage revision or any other business decision to meet such contingencies. REL-G has projected the Employee expenses at the rate of 7.5% over the control period citing that the Commission has considered the same increase to project the employee expenses for FY and also that the increase is inline with the All India Average Consumer Price Index Numbers. Administrative and General Expenses: REL-G in its petition has projected the Administrative and General expenses at the rate of 7% YoY for the Control Period. The expenses have been projected on the revised estimates of A& G expenses that REL-G has submitted for FY Repair and Maintenance Expenses: REL-G in its petition has submitted that R&M expenses are required to maintain the system in healthy condition by carrying out prescribed preventive maintenance and attending breakdown. REL-G has assumed that there will be a growth of 7% YoY on actual expenditure incurred during the year for REL-G. In addition it also submitted that, the FGD Plant will be commissioned during FY and hence the R&M expenses for FGD Plant are considered separately which is exclusive of the YoY Growth. The Commission after considering the licensee s submissions has opined that the existing examples of FGD plant in the country do not point clearly as to the amount of R&M expenses required for an FGD Plant. Hence the Commission has considered the estimates as provided by the Licensee for R&M Expenses towards FGD Plant and accordingly has made provisions for R&M Expenses for the FGD plant separately and added the same to the allowed O&M expenses for the control period. However the Commission would analyze the FGD plant Page 29 of 47

30 R&M requirements elsewhere in the country and at the same time monitor the amount of R&M Expenses incurred by the licensee post commissioning and true-up the expenses based on actuals. The summary of the Employee, A&G and R&M expenses as submitted by REL-G are as given below: Table 10 Licensee submissions of O&M Expenses (Rs. Crore) FY FY FY Employee Expenses A&G Expenses R&M Expenses Total As per clause of the MERC (Terms and Conditions of Tariff) Regulation, 2005, the Commission has prescribed the methodology of arriving at the Operation and Maintenance expenses for existing generating stations. The relevant extract is given as below: (a) The operation and maintenance expenses including insurance shall be derived on the basis of the average of the actual operation and maintenance expenses for the five (5) years ending March 31, 2004, based on the audited financial statements, excluding abnormal operation and maintenance expenses, if any, subject to prudence check by the Commission. (b) The average of such operation and maintenance expenses shall be considered as operation and maintenance expenses for the financial year ended March 31, 2002 and shall be escalated at the rate of 4 per cent per annum to arrive at operation and maintenance expenses for the base year commencing April 1, (c) The base operation and maintenance expenses for each subsequent year shall be escalated at the rate of 4 per cent per annum to arrive at permissible operation and maintenance expenses for such financial year... As per the ATE Order dated April 4, 2007, the Commission has considered the actual audited numbers as base to project the Operation and Maintenance Expenses for the control period. Page 30 of 47

31 The Petitioner has submitted the data on the O&M expenses for the period FY to FY Applying the regulation, the average actual expenses for the five years ending FY , works out to Rs Crore. The base O&M expenses of Rs Crore have been escalated by 4% per annum till FY in accordance with the rate specified in the Tariff Regulations. However, for the Control Period, the Commission has considered an increase of around 5.39% on account of inflation over the allowed level of gross O&M expenses in 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 3 years, i.e., FY to FY , to smoothen the inflation curve, and also as the projection is being made over the Control Period of three years. The Commission has considered a weight of 60% to WPI and 40% to CPI, based on the expected relationship with the cost drivers. The summary of O&M expenses as projected by REL-G and as approved by the Commission for the first Control Period is given in the following Table: Table 11: O&M Expenses for Control Period (Rs. Crore) FY FY FY Licensee Commission Approved Capital Expenditure The Commission has examined the capital expenditure and the amount of capitalisation proposed by REL-G in detail. REL-G has categorized the proposed capital expenditure into three different heads i.e. Up-gradation against technological obsolescence, Environmental performance Improvement and compliance requirement and Reliability, Energy Efficiency & Safety improvement and Risk mitigation. REL-G in its petition has proposed Capital Expenditure for FY , FY and FY as Rs Crores, Rs Crores and Rs Crores respectively and the capitalization during the said period as Rs Crores, Rs Crores & Rs Crores, respectively. The Commission observed that despite the requirement for the petitioner to submit detailed project reports (DPR s) for proposed schemes whose total outlay is above Rs.10 Crores, Page 31 of 47

32 REL-G has submitted only DPRs for two schemes. REL-G has not submitted the DPRs for the other schemes and since no in-principle clearance has been received for the schemes whose DPRs have been submitted, the Commission has considered no new capital expenditure against DPR related schemes for REL-G for the control period. The Commission has considered only non-dpr schemes for approval towards capital expenditure for the control period in the ARR. The Commission considered the CWIP of FY as per the approved capitalization given in the last tariff order to be completely capitalized in the year FY The Commission has given in-principle clearance to the FGD plant in FY as per the details submitted by the licensee the FGD Plant will be commissioned in FY and hence the Commission has considered the entire asset to be capitalized in FY The actual Opening level of GFA for FY has been considered at the same level as approved by the Commission in the last tariff order of REL which amounts to Rs Crore. The same will be trued-up after the actual audited accounts are available. REL-G in its petition has submitted list of schemes which do not require DPR s (outlay less than or equal to Rs 10 Crore). As per the licensee submission the amount of Capital expenditure for the non DPR schemes for the control period is Rs Crore, Rs Crore and Rs.2.10 Crore for FY , FY and FY respectively. After analyzing the past trends in amount of capital expenditure made by REL-G, the Commission has approved Rs Crore, Rs Crore and Rs Crore towards Capital expenditure for FY , FY and FY Based on past trends the Commission has considered the amount of capitalization on the total amount of capex on account of non-dpr schemes to be invested in each year of the control period to be spread across two years i.e. the capital expenditure of FY shall be capitalized in FY and FY in the ratio of 40% and 60% respectively. While Commission has considered the Capital expenditure on non-dpr Schemes, it does not mean approval of capital expenditure of the schemes and that further analysis of Non-DPR schemes would be undertaken by the Commission. The Commission directs REL-G to submit the information regarding the capital expenditure and the capitalisation details for all the schemes i.e. Scheme-wise capital work in progress as per the formats appended as Annexure 2 and the Commission would review the same based on the information submitted by the licensee for each year of the control period. As per the guidelines given in the last tariff order of REL, The Commission holds the view that interest cost during construction (IDC) should not be considered as part of revenue expense, however, the same should be capitalised along with assets, as and when put to use. Page 32 of 47

33 Accordingly, the Commission had considered capitalised cost including, IDC derived based on normative debt (70% of works capitalised) at the interest rate of 8% for the schemes for both FY and FY The capitalization details during the control period are summarised in the following Table: Table 12: Capitalisation Approved for Control Period (Rs.Crore) S.No Particulars FY FY FY DPR Schemes 1. Works Capitalised Interest Capitalised Sub - Total Non - DPR Schemes 1. Works Capitalised Interest Capitalised Sub - Total Total Capitalisation Depreciation and AAD REL-G in its petition has submitted that the amount of depreciation included in the revenue requirement has been estimated using the Straight Line Method (SLM) and the rates of depreciation are as specified in depreciation schedule of the MERC (Terms and Condition of Tariff) Regulation, The overall depreciation rates as per the submission of REL-G amounts to 3.45%, 3.44%, and 3.40% for FY , FY and FY respectively, corresponding to opening GFA of each of the years. The Commission approved figure of Rs. 11 Cr of capitalization for the year FY as per the last tariff order in Case No. 25 of 2005 and 53 of 2005 dated October 3, 2006 has been considered while calculating the opening GFA for FY and the entire capitalization of the FGD plant has been considered in the FY Accordingly, the Commission has determined depreciation expenditure in accordance with the depreciation approved in the previous tariff order dated October 3, 2006 and accordingly an average rate of 3.52% has been applied for the calculation of depreciation for REL-G for the control period. For the amount to be capitalized in the same year, average depreciation has been Page 33 of 47

34 applied. The depreciation expenditure projected by REL-G and approved by the Commission for the control period, has been summarized in the following Table: Table 13 Depreciation for the Control period (Rs. Crore) FY FY FY Licensee Depreciation Opening GFA Average Depreciation Rate 3.11% 3.33% 3.31% Commission Approved Depreciation Opening GFA Average Depreciation Rate 3.52% 3.52% 3.52% 5.4. Interest on Loans REL-G has considered a normative Debt Equity Ratio of 70:30 for financing the capital expenditure projects (corresponding to capitalized assets only). The interest on the loan capital is computed based on philosophy outlined by the Commission in its previous tariff order for REL dated October 3, The Commission in the previous tariff order for REL-G has outlined that interest cost in case of REL-G will have to be determined based on normative loan capital, as per Regulation , 47.1 and 47.2 of the Tariff Regulations and accordingly has considered interest cost of normative debt corresponding to capitalized assets only. The Commission for the control period has considered the normative interest rate for long term loans at 8% interest rate as approved in the previous tariff order. The closing balance of loan as approved in the last tariff order of REL has been considered as the opening balance for FY The details of normative interest cost are summarized in the table below: Page 34 of 47

35 Table 14 Interest on Long Term Loans for Control Period (Rs. Crore) FY FY FY Licensee Opening Loan Balance Capitalisation Debt as % of funding 70% 70% 70% Incremental Loans Repayment Closing Balance of Loans Interest on Long Term Loan Interest Rate 9.89% 9.62% 9.22% Commission Approved Opening Loan Balance Capitalisation Debt as % of funding 70% 70% 70% Incremental Loans Repayment Closing Balance of Loans Interest on Long Term Loan Interest Rate 8.00% 8.00% 8.00% 5.5. Interest on working capital REL-G, in its Petition, submitted that the working capital requirement has been computed in accordance with the Commission s Tariff Regulations, which stipulate the components of working capital of the transmission business. REL-G further submitted that normative interest of 10.25% has been considered using recent Prime Lending Rate (PLR) of State Bank of India (SBI) and since the same was allowed in the last ARR Order dated October 3, 2006, for calculation of interest on working capital. The interest on working capital computation as filed by the Licensee is as follows: Page 35 of 47

36 Table 15 Licensee submission on Interest on Working Capital (Rs. Crore) FY FY FY Cost of Coal for 2 months Cost of secondary fuel oil for 2 months O&M Expense for 1 month Maintenance 1% of the historical cost Less: 1 month Payable for fuel including secondary oil Total Working Capital Computation of working capital interest Rate of Interest (% p.a.) 10.25% 10.25% 10.25% Interest on Working Capital The Commission has estimated the total working capital requirement in accordance with the provisions of Tariff Regulations. Further, the Tariff Regulations stipulates that Rate of interest on working capital shall be 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 is 11.50%, the Commission has considered the same rate for estimating the interest on working capital. The detailed computation of interest on working capital as approved by the Commission for the control period is given in the table below: Page 36 of 47

37 Table 16 Commission approved Interest on Working Capital for the Control period (Rs. Crore) FY FY FY Cost of Coal for 2 months Cost of secondary fuel oil for 2 months O&M Expense for 1 month Maintenance 1% of the historical cost Less: 1 month Payable for fuel including secondary oil Total Working Capital Computation of working capital interest Rate of Interest (% p.a.) Interest on Working Capital 11.50% 11.50% 11.50% Return on Equity REL-G has submitted that Return on Equity (RoE) is computed as per MERC Tariff Regulations, 2005 REL-G has not considered the opening balance for FY as approved by the Commission, and also has revised the amount of capitalization for FY based on revised estimates and then projected the RoE for the control period based on the revised closing regulatory equity for FY The Commission has computed the RoE in accordance with the Tariff Regulations, which stipulates a 14% return on equity per annum on the regulatory equity at the beginning of the Financial Year for which the return is being computed, and on 50% of the equity component of the projected addition to capital assets during the year. The Commission has considered the closing balance of regulatory equity as approved in the last tariff order of REL dated October 3, 2006 as the opening balance for the first year of control period and projected values for the control period. The RoE as approved by the Commission and the detailed calculation for the control period is given in the following Table: Page 37 of 47

38 Table 17 RoE for the control period (Rs Crore) FY FY FY Regulatory Equity at the beginning of the year Capitalisation Equity funding % 30% 30% 30% Equity portion of capitalization Regulatory Equity at the end of the year Return Computation Rate of Return 14% 14% 14% Return on Regulatory Equity at the beginning of the year Return on Equity portion of capital expenditure Total Return on Regulatory Equity Income Tax REL G in its MYT petition for period FY to FY has computed the Income tax by grossing up the ROE at the applicable Tax Rate i.e. Minimum Alternative Tax as REL- G is covered under section 80IA benefit. The Commission is of the opinion that the Licensee should be allowed Tax based on the actual tax paid in the past years thereby not loading the consumers with a higher notional tax amount. REL-G had submitted in its filing that MERC failed to appreciate that REL was entitled to Income Tax on its Licensee business and there was no question of the consumers of Mumbai Licensed Area subsidizing other business of REL by way of payment of notional Income Tax and hence REL-G has used the method of calculating Income Tax by grossing up the RoE. Subsequently as per the ATE Order dated April 4, 2007 for Appeal No. 251 of 2006, stated that computation of income tax by grossing up of RoE is not the correct approach. Further it also stated that the tax for REL-G should be computed on a stand alone basis based on the Page 38 of 47

39 revenue and expenditures of the business so that the consumer are not burdens with the tax of other non-licensed business of REL-G. The Commission also agrees that the computation of income tax by grossing up the ROE is not a correct approach. So, the Commission has adopted the Profit before Tax approach for projecting the tax for the 3 years of the control period. As per this approach, the Commission has assumed the ARR as the revenue from the business and has computed the profit before tax by deducting the various expense head like fuel cost, O&M expense, depreciation, interest on long term loan and interest on working capital. Considering the 80 IA benefit applicable to REL-G, the Commission has applied a MAT rate of 10% and surcharge and education cess of 10% and 3% respectively to the profit thus computed above. The Income tax as projected by the licensee and as approved by the Commission is tabulated below: Table 18 Income Tax for the Control Period Particulars FY FY FY Licensee s Submission Income Tax Commission s Approval Income Tax Non Tariff Income The Commission has considered the non-tariff income for FY as approved in the last tariff order of REL, i.e. Rs Cr and projected the values for control period at same level as given by REL-G. The same shall be trued-up based on the audited actual for FY at the end of the financial year. The non-tariff income projected by REL-G and that considered by the Commission for each year of the control period FY is given in the following Table: Page 39 of 47

40 Table 19 Non Tariff Income for the control period (Rs. Crore) Non Tariff Income FY FY FY Licensee Rent Sale Of Scrap Interest Received - Employee Loans Interest on Contingency Reserve Inv(H.O.) Others Total Commission approved Rent Sale Of Scrap Interest Received - Employee Loans Interest on Contingency Reserve Inv(H.O.) Others Total Aggregate Revenue Requirement (ARR) The ARR of the transmission business of REL-G is the summation of all the expenses and Return on Equity for the generation business. The Commission has determined the ARR for the control period, based on the expenses allowed under various heads and the RoE allowed, as discussed above under different heads. The ARR as allowed by the Commission for the first control period i.e. FY to FY is as given in the following Table: Page 40 of 47

41 Table 20 ARR for the Control period (Rs Crore) FY FY FY FY Tariff Order Fuel Cost O&M Expenses Depreciation AAD Interest on Long-term Loan Capital Interest on Working Capital Income Tax Total Revenue Expenditure Return on Equity Capital Incentive on Availability Less: Non Tariff Income Aggregate Revenue Requirement Sharing of gains and losses The Commission has clearly stated the principle for sharing the gain / loss arising out of controllable and uncontrollable factors under Clause 18 and Clause 19 of MERC (Terms and Conditions of Tariff) Regulations, In case there is a variation due to Uncontrollable factors, the approved aggregate gains / losses arising out of the same, will be passed through to the consumers as an adjustment in the tariff, for the period as specified by the Commission. For example, Fuel Adjustment Charges levied due to variation in the fuel cost of generation / power purchase. In case of variation due to Controllable Factors, the approved aggregate gains and losses will be shared between the consumers and the generating company or the licensee in the following manner; (a) The approved aggregated gain will be shared in the following manner: (i) 1/3 rd shall be passed through to the consumers as a rebate in the Tariff; Page 41 of 47

42 (ii) (iii) 1/3 rd shall be retained as special reserve for absorbing the impact of any future losses arising out of controllable factors; 1/3 rd shall be used by the generating company or the licensee in its own discretion. (b) The approved aggregated losses will be shared in the following manner: (i) (ii) 1/3 rd shall be passed through to the consumers as an additional charge in the Tariff; Balance shall be absorbed by the generating company or the Licensee. Page 42 of 47

43 CHAPTER 5: TARIFF DETERMINATION FOR REL-G Regulation 28 of MERC (Terms and Conditions of Tariff) Regulation, 2005 stipulates a two part tariff for sale of power by generating company, comprising: Annual Fixed Charges Energy Charges 1. Annual Fixed Charges The regulation 28.3 of MERC (Terms and Conditions of Tariff) Regulations, 2005 further stipulates that the Annual Fixed Charges shall consist of recovery of the following components: Return on equity capital; Income-tax; Interest on loan capital; Depreciation, including Advance Against Depreciation, and amortization of intangible assets; Operation and maintenance expenses; and Interest on working capital. The Commission has approved all these components of Annual Fixed Charges for 3 years of the control period in Chapter 4: Determination of the ARR for the Control Period FY to FY of this Order. The same has to be collected by REL-G from REL-D every month. The summary of the same is tabulated below: Table 21- Summary of Annual Fixed Charges Particulars FY FY FY Total Annual Fixed Cost Fixed Charge per month (Rs Crore) Page 43 of 47

44 Further, the Regulation 33.1 of MERC (Terms and Conditions of Tariff) Regulations, 2005 stipulates that the target availability for recovery of full fixed charges shall be 80 percent. 2. Energy Charge Regulation 35.1 of MERC (Terms and Conditions of Tariff) Regulations, 2005 stipulates that the Energy charges shall cover fuel costs and shall be worked out on the basis of ex-bus energy sent out corresponding to scheduled generation. Based on the operational norms approved by the Commission and fuel parameters considered by the Commission the energy charges for the FY is tabulated below: Table 22 Energy Charge Particulars FY Cost of Generation ex-bus (Rs/ kwh) Further, as per the provisions of Regulation 82 of MERC (Terms and Conditions of Tariff) Regulations, 2005 read with the decision of the Commission in Paragraph of this Order shall be applicable for adjustments towards variation in fuel prices with respect to the fuel prices considered by the Commission in the Order, through FAC mechanism. 3. Incentive REL, in its MYT Petition, submitted that the Commission in its Tariff Regulations has provided for an incentive of 0.25 Rs/kWh for ex-bus scheduled energy generation in excess of generation beyond 80% PLF. The Commission has not considered the estimated incentive as part of ARR, as incentive is not a cost component, rather it is a tariff component. The Commission rules that the generation incentive will be Rs 0.25/kWh for the actual generation in excess of generation beyond 80% normative PLF, at the end of the year, based on the actual generation. Page 44 of 47

45 CHAPTER 6: APPLICABILITY OF THE ORDER This Order for the first Control Period from FY to FY , shall come into force with effect from date of issue of the Order and shall continue to be in force till March 31, However, the Tariff approved in the Order shall be deemed to be effective from the date of issue of the order i.e. April 18, 2007 and will remain in force until March 31, Further, the Commission rules that the REL-G will not be allowed to apply the tariff retrospectively as the delay in the issue of the order is because of the delay in filing of the petition by REL-G. The Commission acknowledges the efforts of Consumer Representatives, other individuals and organizations for their valuable contribution to the ARR and Tariff determination process. The Commission would also like to put on record the efforts of its advisors, PricewaterhouseCoopers Pvt. Ltd. Sd/- Sd/- Sd/- (S.B. Kulkarni) (A. Velayutham) (Dr Pramod Deo) Member Member Chairman (Smt. Malini Shankar) Secretary, MERC Page 45 of 47