National Electric Power Regulatory Authority Islamic Republic of Pakistan

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1 J mpg_ :,..,- 4,.., Registrar National Electric Power Regulatory Authority Islamic Republic of Pakistan NEPRA Tower, Attaturk Avenue (East), G-5/1, Islamabad Ph: , Fax: Web: No. NEPRA/TRF-338/FEL-2015/ January 18, 2018 Subject: Dear Sir, Determination of the Authority in the matter of Tariff Petition filed by Fatima Energy Ltd. for its MW Cogeneration Power Plant at Mehmood Kot, District Muzaffargarh Please find enclosed herewith the subject Determination of the Authority along with Annex-I, II & III (26 pages) in Case No. NEPRA/TRF-338/FEL The Determination is being intimated to the Federal Government for the purpose of notification of adjustment in the approved tariff through the official Gazette pursuant to Section 31 (4) of the Regulation of Generation, Transmission and Distribution of Electric Power Act (XL of 1997). 3. Order of the Authority needs to be notified in the official Gazette. Enclosure: As above Secretary Ministry of Energy `A' Block, Pak Secretariat Islamabad CC: 1. Secretary, Cabinet Division, Cabinet Secretariat, Islamabad. 2. Secretary, Ministry of Finance, 'Q' Block, Pak Secretariat, Islamabad. IS- ci ( Syed Safeer Hussain )

2 National Electric Power Regulatory Authority (NEPRA) ***** DETERMINATION OF THE AUTHORITY IN THE MATTER OF FATIMA ENERGY LIMITED FOR ITS MW COGENERATION POWER PLANT AT MEHMOODKOT, DISTRICT MUZAFFARGARH, PUNJAB. -14) January I, 2018

3 The Authority, in exercise of the powers conferred on it under Section 7(3) (a) read with Section 31 of the Regulation of Generation, Transmission and Distribution of Electric Power Act, 1997, Tariff Standards and Procedure Rules, 1998 and all other powers enabling it in this behalf, and after taking into consideration all the submissions made by the parties, issues raised, evidence/record produced during hearings, and all other relevant material, hereby issues this determination. AUTHORITY (HimayatUllah Khan) Member (Syed Masoo ul Hassap N q4/1 I lir Member (Saif Ullah Chat-t-l-raj Member/Vice Chairman /E 1,2-3-7g- (_1110R)-T-a-ticaddozai) Chairman

4 BACKGROUND 1. Fatima Group is a conglomerate of companies having a portfolio of investment in textile, sugar, fertilizer, energy, mining and trading. Fatima Energy Limited (hereinafter referred to as "FEL") is a public limited company, owned by the Fatima Group. The company was incorporated under the laws of Pakistan to set up a MW bagasse and imported coal based cogeneration power plant at Sanawan, MehmoodKot, Tehsil KotAddu, District Muzaffargarh, in the Province of Punjab. The Project is located adjacent to Fatima Group's sugar mill. During the crushing season, the project is capable of generating a net power output of MW, whereas during the non-crushing season the project maintains a net generation capacity of MW. 2. FEL filed a tariff petition on May 16, 2013 which was admitted by the Authority on June 07, In the said petition, FEL proposed sale of net power output, amounting to 50.3 MW, to the National Grid and the remaining 50.0 MW to associated Bulk Power Consumers (BPCs). During the hearing, PPIB objected to the tariff petition in the split mode and was of the opinion that projects under the IPP framework cannot sell electricity in the split mode. FEL, vide letter dated October 23, 2013, requested the Authority to adjourn its tariff petition and issue a generation license based on 100% sale to BPC through a wheeling arrangement. The Authority decided that there was no provision in the rules for adjournment of petition for an indefinite period of time and therefore the tariff petition was dismissed as being withdrawn. On the request of FEL, PPIB cancelled the registration of the project under the Co-Gen Policy on 4th November Subsequently, FEL was granted a Generation License (No. SGC/96/2013 dated December 31, 2013) under section 15 of the Regulation of Generation, Transmission and Distribution of Electric Power Act, 1997 (the "NEPRA Act"). Under the said license, FEL was restricted to sale all (100%) of its generated power to BPCs and only through a wheeling arrangement. FEL started construction of the concerned generation facility in February 2014 and achieved financial close in May 2014 for sale of all (100%) of generated power to BPCs. 4. The Fatima Group had planned for electric power generated from FEL to be wheeled through the network of the relevant Host DISCO (i.e. Multan Electric Power Company Limited (MEPCO)) for supply to designated (BPCs). In this regard, it was envisaged that the Transmission and Interconnection Arrangement consisting of a 132 KV D/C Transmission Line from the Generation Facility/Co-Generation Power Plant of FEL to 220/132 KV Muzaffargarh Grid Station will be constructed,

5 owned and maintained by MEPCO. FEL embarked upon establishing a wheeling arrangement to transport electricity output from FEL to BPCs. Under the wheeling arrangement, the electricity generated from FEL was to be supplied to the grid and withdrawn at exit points agreed with NTDC, host Distribution Company i.e. MEPCO and bulk power consumers. Later on, MEPCO showed its inability to construct the required Transmission/Interconnection Facility and the Fatima Group decided to construct, own and operate its own Transmission and Interconnection Arrangement from their Generation Facility/Co-Generation Power Plant. In order to implement the arrangement, a Special Purpose Vehicle (SPV) in the name of Fatima Transmission Company Limited (FTCL) was incorporated. The Authority granted a Special Purpose Transmission License No. SPTL/01/2015 dated 28th August 2015 to FTCL, pursuant to section 19 of the NEPRA Act, allowing the company to connect FEL's Generation Facility/Co-Generation power plant to the 220/132 KV New Muzaffargarh Grid Station (of NTDC), located in the Province of Punjab. Subsequently, the Authority, vide its decision dated 14th September 2015, approved a Licensee Proposed Modification in FEL's Generation License and authorized FEI, to sell power to CPPA-G, XW-DISCOs, K Electric or any other BPC in addition to already designated BPCs. On the request of FEL, PPIB proceeded to re-register the project under the Co-Generation Policy 2008 on 27th Nov FEL filed a petition for determination of generation tariff on 2nd December 2015, which was granted by the Authority on June 17, 2016, with a levelized tariff of US Cent /kWh on Bagasse and US Cent /kWh on Coal operations on a take and pay basis. FEI, filed a Motion for Leave for Review against the Authority's Determination, which was admitted by the Authority. A decision in the matter of Motion for Leave for Review was issued by the Authority on October 18, 2016 and a revised levelized tariff of US Cents /kWh on Bagasse and US Cents /kWh on Coal was granted to FEL. FILING OF WRIT PETITION 6. Being aggrieved, FEL filed a Writ Petition, against the Decision of the Authority on FEL's motion for leave to review, before the Honorable Islamabad High Court (IHC), Islamabad. In the Writ Petition, FEL raised, inter alia, the following grounds: a. The Co-gen Policy, 2008 issued by the Federal Government is binding upon NEPRA; b. NEPRA should allow "Take or Pay" tariff as mentioned in the Co-Gen Policy and not the "Take and Pay" tariff;

6 c. The tariff determination is discriminatory as NEPRA in the indicative tariff for Pakistan Sugar Mills Association and on the tariff petition of M/s JDW allowed the "Take or Pay" arrangement. Therefore, FEL has a legitimate expectation of being granted a similar tariff on a 'Take or Pay' basis. ORDER OF THE COURT 7. The Honourable IHC, while deciding the writ petition, passed an Order on in the matter. The relevant excerpts of the said order are reproduced hereunder: "---- it is not denied by the respondent that the Co-Gen Policy has not been invoked in the past or that a tariff petition on behalf of PSMA was decided by the respondent. These two circumstances created a legitimate expectation on part of the petitioner that the tariff petition filed by him shall meet the same fate i.e. would be decided in accordance with Co-Gen Policy which was not done in the instant case." "---- the instant petition is allowed and the impugned decisions dated and are set aside; consequently the tariff petition filed by the petitioner shall be deemed pending before the respondent which shall be decided by it in accordance with law as well as keeping in view the letter dated by the Federal Government and observations made hereinabove." PROCEEDINGS 8. Honourable IHC remanded the matter to the Authority for decision, in accordance with law, keeping in view letter of the Federal Government dated and the observations of the Court. In the interest of justice, transparency and compliance with judicial directions, the Authority decided to hold a hearing in the matter on 19th October 2017, with notices being issued to FEL, MW&P, PPIB, CPPA and NTDC. The hearing was held as per schedule and the representatives of FEL, PPIB, CPPA-G and NTDC participated. Subsequent to the hearing comments were received from FEL and CPPA. 9. FEL submitted during the hearing that it was registered with the PPIB as an IPP in August 2010 under the Co-Gen Policy However, in light of the prevailing Circular Debt issue, lenders/banks were not willing to finance IPPs at that time. The lenders proposed selling some power to private sector entities and some power to the national grid. In light of such, FEL filed a tariff petition with NEPRA on a multiple buyer basis in January However, upon being informed that the Policy

7 did not cater for a multiple buyer mode, FEL withdrew its registration and tariff petition and had to convert to a Private-to-Private (P2P) mode of sale. According to FEL investment in the project commenced in 2013 when none of the CPEC, RLNG or large coal projects existed or were conceived. Since Pakistan power market is Single Buyer market and wheeling regime could not succeed on account of various reasons therefore, FEL was constrained to abandon wheeling mode and revert to IPP for exclusive sale to CPPA(G) in mid FEL applied in September 2015 and was again registered under Co-Gen Policy 2008 in November 2015 after clarification from Ministry of Law and Justice which was sought by Ministry of Water and Power at the request of PPIB. Accordingly, the Tariff Petition was filed in December 2015 and determined by NEPRA in June Motion for leave for review in the matter of tariff was decided in October In the instant petition, FEL has prayed for a determination based on the Co-Gen Policy 2008, with a tariff incorporating the following features: Two Part Tariff (Take or Pay) Plant net efficiency at 28% Any other relief as deemed appropriate. TAKE OR PAY ISSUE 11. On the issue of Take or Pay, FEL submitted that since the spirit of the Co-Gen Policy 2008 was followed by the Authority in the case of tariff determinations for PSMA and JDW, the same may be followed in their case. Further, NEPRA has always allowed policy provisions, whether it is the Policy for Power Generation Projects 2002, the Policy for Renewable Energy Projects 2006 or the Policy for Power Generation Further FEL also stated that projects with lower efficiencies and higher tariffs have been allowed in the past and granted Take or Pay tariff, or a Take and Pay coupled with the condition of Must-Run. FEL provided a list of 14 bagasse based power projects, 1 imported coal based power project and 1 Thar coal based power project. Further, there exists a legitimate expectation on the part of the Sponsors and the Project Company for NEPRA to follow the policy provisions of the Co-Gen Policy 2008 and determine a Take or Pay tariff (Two Part Tariff) for the Project. 12. During the hearing, PPIB stated that FEL does not fall under the purview of the Co- Gen Policy 2008 approved by the ECC as it was registered under the guidelines which are approved by the board of PPIB and the guidelines cannot be construed as

8 the Co-Gen Policy As such, FEL's Project has no right under the Co-Gen Policy Director (Legal) PPIB, on the question of the Authority regarding the awarding of LOS despite the fact that FEL's tariff was inconsistent with the Co-Gen policy 2008, submitted that LOS was issued subject to certain conditions. As the sponsor challenged the tariff determination in the Honourable Islamabad High Court and LOS was issued on the sole risk of sponsor's undertaking to accept the decision of court. The court has now set aside the tariff and PPIB would likely cancel the LOS of the project after approval from Board. 14. FEL replied during the hearing that the Court Order has not cancelled the project and has only remanded it back for re-determination and that it has only two concerns and rest of the tariff determination is accepted. FEL further submitted in its comments that the LOS has not been terminated and is in field. As per the terms and conditions of the LOS, there is no ipso facto cancelation of the LOS upon setting aside of the tariff determination by IHC. Since the redetermination of the tariff process has commenced as per orders of IHC and NEPRA has already conducted hearing on 19th October 2017, the Project is not terminated in the eyes of the law and the court. 15. According to FEL, PPIB informed that Project Agreements under the Co-Gen Policy envisage single buyer model only and Government guarantees, concessions, incentives and protections cannot be provided in case of multi buyer regime. The terms of the LOS reflected this exclusivity in consideration of which the Government of Pakistan authorized the Project Company to develop the Project under the Co- Gen Policy. Furthermore, CPPA-G also purchases power exclusively from sellers and therefore requires exclusivity. According to FEL, since the Project Company is selling power to only one buyer, it is all the more critical that Take or Pay (Two Part Tariff) is granted to the Project Company in accordance with the Co-Gen Policy, otherwise the revenues of the Project Company will be subject to variability of dispatch by the Power Purchaser. 16. During the hearing, CEO CPPA-G was of the opinion that the wheeling agreement still exists and in this context whether the role of the power purchaser is single buyer or multiple buyer and the generation license is also on multi buyer. The Authority's determination was on take and pay basis which was looking feasible as the take and pay mode of tariff does not hit the consumer basket as is by other modes of tariff. It was further stated that higher efficiency coal based power plants have been added to the system and the fixed cost/mw of these plants is lower than the fixed cost/mw of FEL. With the induction of coal plants with efficiency of 37%-39% and 62% on other

9 084 Determination in the matter of Fatima Energy Limited technologies, it is expected that the basket price will come down by Rs. 1.5 to Rs. 2 over a period of time. In the current scenario CPPA is not exclusive buyer under the generation license and it reserves its right to purchase from anywhere. 17. FEL, in its comments, submitted that the wheeling mode was unsuccessful. Therefore, FEL was constrained to withdraw from wheeling arrangements and registered the Project with PPIB in November, 2015 under the Co-Gen Policy. Further, the wheeling arrangement and previous private-to-private sale and purchase of electricity is a closed and past transaction. It was also submitted that the Energy Wheeling Agreement was suspended on the insistence of CPPA as it required exclusive sale. 18. FEL in its comments cited the case law Titled Access Solar (Pvt) Limited Versus Federation of Pakistan and Others (2017 CLC 1259) whereby it was held that the legal framework does not envisaged any role of the Power Purchasing Company regarding tariff determination nor empowers it to negotiate the tariff with a generation company which has become eligible under the Policy of It further stated that after the approval of the tariff by NEPRA, the Power Purchasing Company therefore had no power or jurisdiction to negotiate tariff with the petitioner and thus delay the entire process. According to FEL, tariff determination by Authority is binding on its licensees including CPPA-G and cannot deviate from the terms and conditions as determined by the Authority and no discretion is vested in the CPPA-G to decide whether to procure power from the project after the tariff has been determined by the Authority. COMMENTS FROM CPPA-G 19. CPPA-G vide its letter dated 20th October 2017 submitted following comments in the matter: Prevailing Generation License of M/s FEL allows to supply electric power to Power Purchaser on non-exclusive basis, which requires consideration in light of Policy, Legal & Regulatory framework; Transition of the subject power plant from the Energy Wheeling Arrangement (EWA) to its enrollment under policy framework requires due consideration in light of the existing EWA. Generation License and necessary consents under the prevailing regulatory framework; CPPA-G reserves its rights to provide inputs to the Authority in due course of the tariff hearing (to be initiated pursuant to discussion of legal matters on the

10 subject issue) to assist arriving at the informed decision, taking into accounts perspective implications on the basket price in view of prevailing dynamics of the power sector. 20. Keeping in view the above comments, CPPA-G was directed vide letter 10th November 2017 to submit their detailed input for the assistance of the Authority. CPPA-G vide its letter No. 14th November 2017 submitted that "submissions of this office on the subject matter were primarily made on account of legal framework of the subject case, with the understanding that the separate proceedings will be initiated for determination of the tariff for the subject power plant. Consequently, it is requested that the comments of this office submitted vide (ii) may be considered by the Authority on account of legal framework of the subject matter. Further, submissions of CPPA-G pertaining to tariff parameters will be placed in the proceedings expected to be initiated by the Authority, for determination of tariff for the captioned project, after finalizing the legal matters mentioned above". 21. CPPA-G was again directed vide letter dated 23rd November 2017 that no separate proceedings for determination of tariff will be initiated, therefore, you are advised to submit your comments pertaining to tariff parameters within five days. CPPA-G vide its letter No. CEO/CPPA(G)L/2017/Admn/ dated 29th November 2017 submitted following comments in the matter: a) Keeping in view the prevailing dynamics of the power sector, implications of efficiency on the basket price needs to be accounted for in the tariff determination; b) Bagasse Pricing mechanism, as established in the recent bagasse based cogeneration upfront tariff dated , may also be considered by the Authority in the instant case; c) The allowed Internal Rate of Return may also be considered by the Authority on account of recent determination for bagasse based co-generation upfront tariff dated ; d) Withholding tax on dividends may not be allowed as pass-through, consistent with upfront tariff determination for bagasse based co-generation dated e) It is apprised that the non-performance of the Plant during conversion of fuel is difficult to calculate. Further, during conversion of fuel, the exact amount of fuel burnt is difficult to measure. Accordingly, the same may be addressed in the tariff determination;

11 f) Dispatch should be ensured on merit order except during system constraints as per Grid code; COMMENTS FROM PPIB 22. PPIB was directed vide letter dated 10th November 2017 to file written comments in the matter for assistance of the Authority within five days. PPIB did not offer any comments in the matter. However, PPIB vide its letter dated 12th December 2017 informed that the PPIB Board in its 111th meeting, held on 31st October 2017, has approved withdrawal/termination of Letter of Support (LOS) of M/s Fatima Energy Limited with retrospective effect from the date of judgment of Honorable Islamabad High Court (i.e. 6th September 2017). Subsequently, PPIB terminated FEL's LOS for establishment of 118.8MW Co-Generation Power Project, vide letter No. 1(111) PPIB- 3008/18/PRJ/ dated COMMENTS FROM MINISTRY OF ENERGY 23. Ministry of Energy (MoE) was requested vide letter dated 10th November 2017 to submit comments in the matter for assistance of the Authority. MoE vide its letter No. Tariff/FEL-2013 dated 16th November 2017 submitted as "the Authority may proceed further on the subject matter as per policy." 24. Ministry of Energy (MoE) vide its letter No. IPPs-6(10)/2017-C dated 5th January 2018 submitted the following decision of Cabinet Committee on Energy (CCoE) in Case No. CCE-41//10/2017 dated 12th December 2017: "The Cabinet Committee on Energy approved rescindment of the National Policy for power Co-Generation by Sugar Industry (Co-Gen Policy 2008) with immediate effect." DECISION OF THE AUTHORITY 25. The Authority has considered the submissions made by FEL, CPPA-G, PPIB and MoE in the matter and has also perused the relevant record. 26. The instant matter has been remanded to the Authority by the Honorable High Court with the following directions "8. In view of the judgment of this Court, though the guidelines are not binding on the Authority but also cannot be ignored, however, if the respondent is of the view that they are inconsistent with the provisions of the Act then proprietary

12 demands that the reasons for not following the same or the part of Policy/Guidelines which are inconsistent with the Act, should be highlighted, which was not done in the instant case. Neither the initial determination nor the decision in Motion for Review clearly spell out the reasons for not following the Cogen Policy and the same or any part of it being inconsistent with the 1997, Act. 10. For the reasons set out above, the instant petition is allowed and the impugned decisions dated and are set aside; consequently the tariff petition filed by the petitioner shall be deemed pending before the respondent which shall be decided by it in accordance with law as well as keeping in view the letter dated by the Federal Government and observations made therein." 27. The Court has directed the Authority to determine FEL's tariff in accordance with law, keeping in view letter dated by the Federal Government, and the observations of the court in its decision. In its order, the Honorable Court has observed that while guidelines are not binding on the Authority, they cannot be altogether ignored. If the Authority is of the view that guidelines are inconsistent with the provisions of the Act, then propriety demands that reasons for not following whole, or part, of the policy/guidelines, which are inconsistent with the Act, should be specified. The Court observed that neither the initial determination nor the decision in the review motion clearly spell out reasons for not following the Co-gen Policy 2008 and the reasoning behind why Policy has been found inconsistent with the NEPRA Act. 28. In view thereof, at the outset, it is pertinent to deliberate on the inconsistency, if any, of the Co-gen Policy with relevant provisions of the NEPRA Act and to ascertain the role of the Authority, regarding determination of tariff, as enunciated in statute. 29. Under Section 7(1) of the NEPRA Act, the Authority is "exclusively responsible for regulating the provision of electric power services" in the country. 'Electric power services' is defined under Section 2 (x) as "the generation, transmission or distribution of electric power and all other services incidental thereto". As such, NEPRA is empowered, to the exclusion of all others, to regulate the generation, transmission and distribution of electric power and all other services incidental thereto. The Honorable Court has itself made this observation in its decision relating to the instant matter, dated , as follows "There is no cavil with the arguments of the learned counsel for the respondent that NEPRA is an independent body and is not subservient to the Federal

13 Government or any of its department(s). There is also no cavil with the proposition that fixation/determination of the tariff is the exclusive function of NEPRA" 30. Under Section 7(3)(a),NEPRA shall "determine tariff rates, charges and other terms and conditions for supply of electric power services by generation, transmission and distribution companies and recommend to the Federal Government for notification"(emphasis added). This power is qualified, by Section 7(6), to protect consumer interest and be in accordance with guidelines laid down by the Federal Government that are consistent with the provisions of the Act. With regards to determination of tariff, the grounds and standards for tariff determination to be followed by the Authority are provided in Rule 17(3) of the National Electric Power Regulatory Authority (Tariff Standards and Procedure) Rules, Furthermore, the National Electric Power Regulatory Authority Licensing (Distribution) Rules, 1999 place an obligation on distribution companies to procure electricity economically, with the Authority being responsible for ensuring economic procurement and rationalized consumer-end tariffs. 31. From the foregoing provisions of law, it is apparent that the focal point of tariff determination is consumer interest. 'Consumer interest' may be defined as the maximization of consumer welfare, which includes competitive energy pricing and efficiency in energy supply. Consumer interest is the Authority's primary concern when exercising its regulatory authority, with greater weight placed on potential risks to consumers than on potential benefits to licensees. Rule 17(3), ibid, which governs the principles of tariff determination, itself prescribes consumer interest as the foremost consideration and feature of tariff determination. As such, the duty to protect and preserve consumer interest is a statutory duty imposed on the Authority by the NEPRA Act, and therefore cannot be repudiated under any policy or guidelines issued by the Federal Government. 32. In furtherance to the above, the instant tariff petition and vires of the Co-Gen Policy under the provisions of the NEPRA Act shall be determined on the consumer interest yardstick, as prescribed under statute. Issue of Two Part Tariff ('Take or Pay' or 'Take and Pay') 33. The major point of controversy in the Co-Gen Policy, and indeed FEL's primary dispute in the instant petition, is the subject of dispatch arrangement, specifically the issue of 'Take or Pay' or 'Take and Pay'. Under the Take or Pay arrangement, a twopart tariff is granted, comprising of both energy payments and capacity payments.

14 Energy payments are made to the generation company on the basis of actual amount of electric power generated and procured by a power purchaser. Capacity payments are fixed payments made to the generation company on the basis of available capacity. These capacity payments are made irrespective of actual amount of electric power generated and purchased, provided plant is available for despatch. Conversely, in a Take and Pay arrangement, a single part tariff is granted. Under such an arrangement, the power purchaser only has to make payments for actual amount of energy generated and purchased. 34. The Co-Gen Policy 2008 prescribes capacity payments to be made in tariffs granted there under, in Article (ii), thereby stipulating a Take or Pay arrangement under the Policy "... capacity payment will be made on the basis of available capacity..." 35. The Co-Gen Policy was enacted in 2008, in the wake of energy shortfalls and deficits experienced by the country at the time. Co-Generation power plants presented a source of generation to bridge the energy demand-supply gap. Therefore, a Policy was enacted to exploit this opportunity. However, almost a decade has passed since that time and the status of power availability in the country has drastically improved. At present, the country is in a surplus mode of energy, with numerous, large and highly efficient, power projects in the pipeline. The energy deficits experienced by the country in its preceding years have effectively been bridged and future increases in demand are being addressed with upcoming efficient projects. As such, the circumstances under which the Co-Gen Policy was enacted, and the challenges it sought to tackle, no longer exist today, thereby rendering the Policy as irrelevant. Recognizing these reasons, the Ministry of Energy itself has rescinded the Co-Gen Policy, vide its letter No. IPPs-6(10)/2017-C dated 5th January The Co-Generation Policy envisions power production with efficiencies at 28%. This level of efficiency is exceedingly poor as compared to existing power projects. Coal power plants boast efficiencies as high as 39% and the Authority has approved technologies that have efficiencies upto 62%. As such, awarding 'Take or Pay' tariff on low efficiencies, as prescribed under the Co-Gen Policy, is highly imprudent, inefficient and unattractive. In the years of energy shortfalls, this form of inefficient energy generation may have been a viable recourse. In today's energy landscape, where there is surplus generation, the technology employed by FEL finds itself at exceedingly low efficiency and at the lower spectrum of the merit order (the order in which energy is dispatched by the national grid). If NEPRA were to grant a tariff today, in complete accordance with the provisions of the Co-Gen Policy, such a tariff

15 would entail guaranteed payments and cost reimbursement to inefficient power projects that may never dispatch a unit of electric power, i.e. under the Take or Pay arrangement because of being low in merit order. This is not only imprudent but also an explicit violation by the Authority of Section 31 of the NEPRA Act, that prohibits the Authority from determining tariffs that discourage economic inefficiency or that create exploitation and economic distortions. Furthermore, the answer to whether inefficient power production, as prescribed in the Co-Gen Policy, is in the consumer interest and sustainability of the entire sector, in today's environment, is in the negative. As such, an exhaustive implementation of the Co- Gen Policy in today's energy landscape, and specifically the grant of Take or Pay tariffs under the Policy, stands at odds with the provisions of the NEPRA Act and the consumer interest that NEPRA is obligated to preserve. 37. In the instant case, FEL has requested a Take or Pay arrangement under the Co-Gen Policy, which would grant capacity payments to FEL amounting to Rs. 4,530 million per annum approximately. These payments will be compulsory even where FEL does not sell a single unit of energy because of being low on merit order. The approval and sanction of such a scheme would be imprudent and extortionate on part of the Authority, which is mandated with safeguarding the consumer interest and the sustainability of the sector, by ensuring affordable, competitive and economically prudent electric power to the public. 38. It is pertinent to mention that the Authority, in its original determination, also addressed this issue and observed as under- 46. The Authority having considered the argument put forward by the Petitioner in support of two part tariff observed that under Section 7 of the NEPRA Act, the determination of tariff and the terms and conditions thereof is a core function of NEPRA which cannot be delegated to anybody else. Further, the guidelines of Federal Government are applicable only when they are not inconsistent with the provisions of the NEPRA Act. As per the NEPRA Act, it is the obligation of NEPRA to ensure provision of affordable and economical electric power to the consumers. Therefore, if the policy or guidelines of the Federal Government are such which contradict with the functions of NEPRA, then the same are not binding on NEPRA. 47. In the same context the Authority considers that two part tariff bound the power purchaser in a take or pay contract which is inefficient and against the spirit of competition. The Authority considers that it will be against the spirit of I.;

16 the provisions of NEPRA, which require to bring not only efficiency in the power sector but also to protect the interest of the consumers. Allowing the projects long-term take or pay arrangement having very low efficiency cannot be justified and will be an imprudent decision. The Petitioner's decision for setting up a plant of low efficiencies is Petitioner's commercial decision for which consumers should not be suffered. Therefore, the Petitioner request of take or pay tariff is rejected and the Petitioner is allowed a take and pay arrangement for dispatch. For this purpose, economic dispatch merit order will be used considering the energy component only. 39. Notwithstanding the above, it is pertinent to mention that the Co-gen Policy 2008 has now been revoked by the Federal Government, which lends further credence to the irrelevance of the policy in today's energy landscape. It may further be noted that FEL's project has relatively low thermal efficiencies, of 29.21%, as compared to efficiencies of 37%-39% (approved for coal IPPs), and relatively high capital cost/mw as compared to other IPPs. 40. Another important aspect that needs to be considered is that FEL signed an EPC Contract in December 2013, for construction of the power complex for sale of power generated solely to BPCs. This was undertaken on FEL's own business risk. Construction commenced in February 2014 for sale of generated power solely to BPCs, without reaching financial close. This again was done on FEL's own business risk. Financial close was later achieved in May 2014, again for sale of generated power solely to BPCs. These actions by FEL signify that the company did not develop the project for sale of power to the national grid, as envisioned under the Co-Gen Policy, therefore the question of obtaining concessions under the Policy does not arise. Moreover, FEL filed the relevant tariff petition in December 2015, at a considerably advanced stage of construction. These circumstances indicate that FEL never maintained the intention of executing the project under the provisions of the Co-Gen Policy. 41. Notwithstanding the foregoing, it is pertinent to highlight NEPRA's prudence in FEL's tariff determination. The Authority maintains the power to altogether decline a tariff for FEL's project on the basis of the foregoing grounds alone. However, the Authority, keeping in mind the interest of the licensee, allowed a take and pay tariff in its original determination, which effectively provides a bulwark against complete desolation of the project. 42. It needs to be appreciated that FEL's project was enrolled under the Con-Gen Policy in 2015, when the project was at an advance stage of construction and had failed to achieve intended sale arrangements with relevant BPCs. The decision to set up a

17 power project under such parameters and circumstances, with associated business risks, was solely that of the project sponsor. In view thereof, it was prudent on part of the Authority to allow the project to provide power to the national grid when the project comes within the merit order, otherwise the project was to find other private avenues for selling electric power, to BPCs in the market or to K-Electric through wheeling arrangement. In light of the inherent business risks associated with such a project, adopted voluntarily by FEL, it is irrational to seek specific terms and conditions of tariff from the Regulator, by citing the Co-Gen Policy, simply because the project failed to achieve intended sale arrangements with BPCs during the construction phase. The business risks of not finalizing favorable terms and conditions of sale have to be borne by the project sponsor and not any other entity, let alone the consumers. 43. The Hon' able Court observed that the petitioner had legitimate expectation that tariff filed by it shall meet the same fate as that of PSMA and JDW. With utmost respect and reverence to the observation of the Honorable Court, the fact of change in ground reality, surplus generation capacity, historical analysis of the case and consumer interest were not presented before the Hon' able Court. The earlier tariffs granted to PSMA in 2008, and to JDW in 2010, were done in circumstances where the country was experiencing acute shortages of power, with no forthcoming power projects in the pipeline to bridge the deficit. Conversely, in 2015, the number of large power projects, approved and under construction, increased exponentially. Moreover, it would be pertinent to mention that no power plant has been constructed under the Co-Gen Policy, including JDW. As such, legitimate expectation of grant of tariff under the Co-Gen Policy cannot be claimed by citing PSMA and JDW as precedent. Further, as discussed above it is an admitted position on record that FEL's project was initially listed under the Co-Gen Policy. However, subsequent to an application, from the petitioner itself, the same was cancelled and the project was diverted away from the Policy. Furthermore, the petitioner then tried to sell electric power to Bulk Power Consumers, contrary to the Co-Gen policy. Since the petitioner himself had opted out from and renounced the same therefore it cannot claim its benefit as an afterthought. It is also settled jurisprudence that legitimate expectation has to be reasonable and have backing of law, which are elements absent from the instant case. In addition, the Supreme Court of Pakistan has categorically held that the doctrine of legitimate expectancy cannot be invoked to nullify the effect of a legislative provision (2000 SCMR 112), which FEL has sought to do in the instant case by pressing a petition that violates the provisions of the NEPRA Act pertaining to economic procurement of electric power.

18 44. Therefore, in accordance with the powers conferred under Section 7(3)(a) of the NEPRA Act and keeping in view the foregoing deliberations, the Authority hereby decides to approve the 'take and pay' feature of tariff in the instant case. Further, the Authority hereby finds the Co-Gen Policy 2008 and the letter issued by the Federal Government, dated ,to the extent of two part tariff (take or pay), to be inconsistent with the principles and explicit provisions of the NEPRA Act, keeping in view the present ground realities, surplus power generation in the country, historical background of the case and interest of the consumers. Issue of Efficiency 45. FEL submitted that Article (i) of the Co-Gen Policy 2008 states as "the tariff will be levelized for 30 years and will be available for 60 MW or above capacity based on 28% net thermal efficiency. "FEL further stated that it accepted and confirmed 28% being mandatory requirement against the actual weighted average efficiency of 26.5%. The Co-Gen Policy was formulated to encourage efficient use of indigenous precious fuel of bagasse and supply of power all year round. FEL project is utilizing bagasse in most efficient manner in this configuration in Pakistan. 46. The Authority determined net thermal efficiency of 29.21% against the requested efficiency of 28% by the Petitioner. According to the Petitioner, its actual efficiency was 26.5% but since the efficiency benchmark in Co-Gen Policy is 28%, therefore, the same is being requested. The efficiency of 29.21% was determined in the light of actual efficiency without extraction of steam during crushing season which was also guaranteed by its EPC contractor. The Authority in the matter of JDW determination dated 2nd April 2010 decided that the efficiency of 28% mentioned in the National Policy for Power Co-Generation 2008 should be considered as a floor and not as a ceiling not only in the instant case but also for the future Co-Gen power Plants. The Authority for reasons discussed above has, therefore, decided to determine 29.21% as thermal efficiency in the instant case. Other components of tariff 47. Although the Authority's determination dated June 17, 2016 and review decision dated October 18, 2016 were set aside by the Hon' able Court but the Petitioner during the present proceedings concurred with the reasoning and findings of the Authority in the said decisions except for the issue of two part tariff (Take or Pay) and plant efficiency, which are discussed at length above. The Petitioner did not agitate or dispute any other tariff component as determined by the Authority in its earlier decision. In view of the admission and acceptance thereof, the Authority finds no reason to alter, change or vary its observations and reasoning. The order part of this determination is reflective of the same.

19 Case No. NEPRA/TRF -338/FEL-2015 ORDER 48. Pursuant to Section 31 (4) of the Regulation of Generation, Transmission and Distribution of Electric Power Act, 1997 read with Rule 16 (11) of NEPRA (Tariff Standards and Procedure) Rules, 1998, the National Electric Power Regulatory Authority (hereinafter the "Authority") for reasons recorded in the determination hereby determines the following reference tariff for Fatima Energy Limited (hereinafter the "Petitioner") for sale to Central Power Purchasing Agency (CPPA- G) on take and pay basis: Tariff Components Year 1 to 10 Year Indexation Capacity Charge (Rs/kWh) Fixed O&M Foreign US$ /PKR & US CPI Fixed O&M Local Local CPI (General) Cost of Working Capital KIBOR +2% Insurance US$ /PKR (If any) Debt Service KIBOR+3% Return on Equity US$ /PKR Total Capacity Charge Energy Charge Rs./kWh Fuel Cost Component (Bagasse) Fuel Price Fuel Cost Component (Coal) Fuel Price Ash Handling (Bagasse) Ash Handling (Coal) Variable O&M Local Local CPI (General) Variable O&M Foreign US$/PKR & US CPI EPP (Bagasse) EPP (Coal) Total Tariff (Bagasse) Total Tariff (Coal) Note: (i) The tariff has been calculated on the basis of net capacity of MW and annual 88% plant factor of GWh. The net capacity is subject to adjustment at the time of COD as per IDC test. In case the net capacity is established higher than the minimum capacity, the relevant tariff components shall be adjusted accordingly. However, no adjustment is allowed

20 in case the net capacity is established less than minimum net capacity of MW. (ii) The above tariff is applicable for the period of 30 years on BOO basis commencing from the date of Commercial Operation. (iii) Debt Service shall be paid in the first 10 years of commercial operation of the plant or 7, GWh whichever is earlier. (iv) The Seller shall be entitled for the capacity charges in case it falls in the merit order and CPPA-G do not procure power from the Seller. (v) Thermal efficiency has been taken as 29.21%. (vi) Component wise proposed tariff for operation on Bagasse and on Coal is indicated at Annex-I & II respectively. (vii) Debt Servicing Schedule is attached as Annex-III. I. The following adjustments /indexations shall be applicable to reference tariff; One Time Adjustment Adjustment in EPC Cost II. The Authority has assessed total EPC cost of US$ million at equivalent US dollar. That include the following payables: EPC Cost Payables Million US$ Portion Euro Portion III. IV. Since the exact timing of the above mentioned payables to EPC contractor is not known at this point in time therefore, adjustment for relevant foreign currency fluctuation for the portion of payment in the relevant foreign currency will be made at COD. In this regard, the sponsor will be required to provide all the necessary relevant details along with documentary evidence. At this stage $ portion of EPC is converted to equivalent Rs at assumed PKR to US$ exchange rate of and Euro portion at assumed PKR to Euro exchange rate of The adjustment shall be only for currency fluctuation against the reference parity values according to the following mechanism;

21 EPC payables ($ portion) (Ad;.) = PKR 2, million / 105.5x E (PR) EPC payables (Euro Portion) (Ad) ) = PKR million / x E (PR) Where: E (PR) = Respective Weighted Average PKR/EURO and PKR/US$ parity based upon timing of the payment V. The tariff components i.e. Insurance, ROE, Principal Repayment and Interest Charges etc. shall be adjusted based on EPC currency fluctuation at COD and based on other project cost items that are allowed to be adjusted as prescribed in the determination. Adjustment due to Variation in Net Capacity VI. The reference tariff has been determined on the basis of minimum net capacity of MW at delivery point at mean site conditions. All the tariff components except fuel cost component shall be adjusted at the time of COD based upon the Initial Dependable Capacity (IDC) tests to be carried out for determination of contracted capacity. Adjustment shall not be made if IDC is established less than MW net capacity at reference site conditions. The adjustments shall be made according to the following formula: CC (Add.) = CC (Ref) x / NC (ipc) CC (Adj.) = Adjusted relevant Capacity Charge components of tariff CC (Ref)= Reference relevant Capacity Charge components of tariff NC (rock = Net Capacity at reference site conditions established at the time of IDC test Note:- Reference capacity charge components of Tariff i.e. Revised O&M Foreign, Revised O&M Local, Insurance, Debt Servicing., Return on Equity etc. to be adjusted as per IDC test. Adjustment in Insurance as per actual VII. The actual insurance cost for the minimum cover required under contractual obligations with the Power Purchaser not exceeding 1.0% of the EPC cost will be treated as pass-through. Insurance component of reference tariff shall be adjusted

22 as per actual on yearly basis upon production of authentic documentary evidence by FEL. Adjustment in Return on Equity (ROE) VIII. Return on Equity will be quarterly adjusted on account of variation in PKR/US$ parity according to the following formula: Indexations: Where; ROE (Rev) = ROE (Ref) X ER (Ree)/ ROE (Rev) = Revised ROE ROE (Ref) = Reference ROE ER (Rev) = The revised TT & OD selling rate of US dollar as notified by the National Bank of Pakistan IX. The following indexation shall be applicable to the reference tariff as follows: a) Indexation applicable to O&M The Fixed O&M local component of Capacity Charge will be adjusted on account of Inflation (CPI) and Fixed O&M foreign component on account of variation in US CPI and dollar/rupee exchange rate. Quarterly adjustment for local inflation, foreign inflation and exchange rate variation will be made on Pt July, 1st October, 1stJanuary and Pt April based on the latest available information with respect to CPI notified by the Federal Bureau of Statistics (FBS), US CPI issued by US Bureau of Labor Statistics and revised TT & OD selling rate of US Dollar notified by the National Bank of Pakistan. The mode of indexation will be as under: i) Fixed O&M F O&M (LREV) = Rs /kWh x CPI (REV) / F O&M (FREV) = Rs /kWh x US CPI (RE x ER (REV)/105.5 Where: F O&M (LREV) = The revised applicable Fixed O&M Local Component of the Capacity Charge indexed with Local CPI

23 Determination in the matter of Fatima Energy Limited F O&M (FREV) = The revised applicable Fixed O&M Foreign Component of the Capacity Charge indexed with US CPI (All Urban) and Exchange Rate variation CPI (REV) = The revised Local CPI (General) US CPI (REV) = The revised US CPI (All Urban) ER (REV) the Revised TT & OD selling rate of US dollar as notified by the National Bank of Pakistan ii) Variable O&M The formula for indexation of variable O&M component will be as under: V O&M (LREV) = V O&M (FREV) = Where: V O&M (LREV) = V O&M (FREV) = Rs /kWh x CPI (REV)/ US CPI (REV) - The revised US CPI Rs /kWh x US CPI (REV)/ x ER (REV)/105.5 The revised applicable Variable O&M local Component of the Capacity Charge indexed with CPI The revised applicable Variable O&M Foreign Component of the Capacity Charge indexed with US CPI and Exchange Rate variation ER (REV) = the Revised TT & OD selling rate of US dollar as notified by the National Bank of Pakistan Note: iii) Adjustment for KIBOR variation The reference USCPI and Local CPI values are of March The reference Variable O&M indicated above shall be replaced with the revised number at COD after incorporating the required adjustment based upon the IDC test. The interest part of fixed charge component will remain unchanged throughout the term except for the adjustment due to variations in interest rate as a result of variation in 6 months KIBOR according to the following formula: A I (L) P (LREV) x (KIBOR (REV) %)/2

24 Where: A I (L) = P (LREV) = the variation in interest charges corresponding to variation in biannual KIBOR. A I can be positive or negative depending upon whether KIBOR (REV) > or <9.53%. The interest payment obligation will be enhanced or reduced to the extent of A I for each half of the year under adjustment applicable on biannual basis is the outstanding principal (as indicated in the attached debt service schedule to this order) on 6 month basis on the relevant biannual calculations date. Period 1 shall commence on the date on which the first installment is due after availing the grace period. iv) Fuel Price Variation The reference coal and bagasse based fuel cost components have been computed on the basis of net calorific value of 6000 kcal/kg and 1740 Kcal/kg, respectively while using net thermal efficiency of 29.21% for both the fuels. While calculating fuel cost component, a coal CIF price of US$ per ton and the bagasse price of US$29.19 per ton have been assumed. The adjustment in price of coal will be allowed to the Petitioner based on the revised coal price in accordance with coal price adjustment mechanism approved by the Authority dated September 23, Pursuant to the Upfront Bagasse tariff determination dated July 07, 2015 bagasse price is linked with the CIF price of coal with the floor of US$ ,therefore, adjustment of fuel cost component on bagasse shall be given in accordance with coal price adjustment mechanism and on the basis of coal price CIF ceiling as defined in the Upfront Bagasse determination. In future FEL's fuel cost component along with cost of working capital shall be subject to change in case any change is approved in the bagasse and/or coal pricing mechanism. X. Terms and Conditions of Tariff: a. The tariff is applicable for a period of 30 years commencing from the date of the Commercial Operation.

25 b. All new equipment will be installed and the plant will be of standard configuration. c. Dispatch criterion will be based on the Energy Charge. d. If there is any change in any assumption that may lead to change in the tariff, the same shall be referred to NEPRA for approval. e. 100% of debt has been assumed to be local, provided however that in the event FEL uses a mix of foreign and local loan, the future benefits of the lower interest rates shall be passed on to the Power Purchaser. f. No corporate income tax and no minimum turnover tax have been assumed. g. Working capital has been financed by a separate Working Capital facility, and is not included in the project cost. h. CPPA-G is hereby directed to enter into a Power Purchase Agreement with FEL in accordance with this tariff determination and generation license of the petitioner, whereby the petitioner is authorized to sell power to multiple buyers. XI. XII. The above tariff and terms and conditions are required to be incorporated in the Power Purchase Agreement between FEL and CPPA-G. The above order is to be intimated to the Federal Government for notification in the official Gazette under section 31 (4) of the Regulation of Generation, Transmission and Distribution of Electric Power Act, 1997.

26 Year Fuel Cost Component FATIMA ENERGY LIMITED MW CoGen Power Plant (Operation on Bagasse) Annex - I Energy Charge Rs/kWh Capacity Purchase Pr ce (PKR/kWh) Total Total Var. O&M Total Fixed O&M Tariff Tariff Ash Cost of Debt Interest Total ROE Rs. /kwh Cents/kWh Disposal Foreign Local EPP Local Foreign W/C Insurance Repayment Charges CPP , Average Levelized Levelized Tariff = Rs./kWh Cents/kWh

27 Year t-a I IMA tritkuy LIMI I tu 11 d.ts MW C;ocien Power viant (operation on uoai) Annex - II _ Energy Purchase Price (Rs./kWh) Capacity Purchase Price (PKR/kWh) Total Total Fuel Cost Var. O&M Total Fixed O&M Tariff Tariff Ash Cost of Debt Interest Total Componen ROE Disposal Foreign Local EPP Local Foreign WIC Insurance Repayment Charges CPP Rs. /kwh Cents/kWh t Average Levelized Levelized Tariff = Rs./kWh Cents/kWh