And. ORDER (Hearing dated February 24, 2016)

BEFORE THE UTTAR PRADESH ELECTRICITY REGULATORY COMMISSION, LUCKNOW Suo-Moto Proceeding PRESENT: 1. ShriDesh Deepak Verma, Chairman 2. Shri I. B. Pandey, Member 3. Shri Suresh Kumar Agarwal, Member IN THE MATTER OF: Suo-Moto Proceedings on the purchase of power from Power Exchange by UPPCL(Reference Letter No. SPATC-312/IEX/376 dt. August 4, 2015) IN THE MATTER OF: And 1. The Chairman, U. P. Power Corporation Ltd., 7 th Floor, Shakti Bhawan, 14, AshokMarg, Lucknow 226001. 2. The Managing Director, U. P. Power Corporation Ltd., 7 th Floor, Shakti Bhawan, 14,Ashok Marg, Lucknow 226001. The following were present: 1. ShriRam Swarath, Director, SLDC 2. Shri Rajiv Srivastava, Advocate, UPPCL 3. ShriS. P. Gupta, EE, SLDC 4. Shri Sanjay Verma, EE, UPPCL 5. Mohd. ManzarHussain, EE,UPPCL 6. ShriAvadhesh KumarVerma, Chairman UPRVUP ORDER (Hearing dated February 24, 2016) The Commission receiveda report / letter fromiex (Letter No. IEX/BD/1250/15-16) dated May 26, 2015 in which IEX hadanalyzedthe potential savings in power purchase cost of Uttar Pradesh. It was further submitted that, this can be achieved by scheduling power in such a way thatif Power Exchange prices are lower than variable cost of power under long term Page 1

PPA then same power of long term PPAs, can be replaced with cheaper power available at the Power Exchange.As per data submitted by IEX, Uttar Pradesh could have made substantial saving in the month of April 2015, if they had replaced 878 MUs (1200 MW RTC) taken under long term PPAs with the cheaper power available in Power Exchange. IEX submitted the following comparative analysis for April 2015 and July 2015 depicting the possible saving inpurchase of power. April 2015 Power Station Energy Charge IEX Price (Rs/kWh) (Rs/kWh) Bajaj Hindustan 4.74 Rosa Power Project II 3.93 1.45 Rosa Power Project I 3.91 1.43 IGSTPP, Jhajhar 3.81 1.33 Dadri Gas 3.79 1.31 Auraiya 3.65 1.17 Farakka 3.61 1.13 Panki 3.55 2.48 1.07 Per Unit Saving (Rs/kWh) 2.26 Harduaganj 3.44 0.96 Dadri Thermal 3.35 0.87 Anta 3.34 0.86 Kahalgaon St. I 3.32 0.84 Dadri Extension 3.30 0.82 Kahalgaon Ph. I St. II 3.13 0.65 Parichha 3.12 0.64 IEX also submitted that the average (RTC) price and average price during night hours (11pm- 6am) discovered for Uttar Pradesh at Power Exchange wasrs. 2.48 / kwh and Rs. 2.40 / kwh for April 2015. The Commission vide its letter dated May 29, 2015 sought comments from UPPCL on the letter dated May 26, 2015 submitted by IEX. UPPCL submitted its comments on the same vide theirletter dated August 4, 2015. UPPCL in the letter discussed about itspower procurement philosophy, management and regulation of power followed by them. UPPCL analysed the proposal of IEX and made the following submissions:- Page 2

i) In case of power purchase through Power Exchange point of injection is not known until allotment of power is finalized. ii) Sometimes power procured through short term bilateral agreement or Power Exchange is not scheduled beyond certain limit because such transactions do not have prior identification in terms of point of injection and point of drawl and their impact on power flows in the grid is neither known nor could be predicted. iii) Due to congestion in grid, there have been occasions that despite the availability of power and agreements, UPPCL had been constrained to receive power, but if long term PPA would have been there, then power would have flown because of availability of long term transmission capacity. iv) As suggested by IEX if all the states start regular surrendering oflong term power and purchase the corresponding power from Power Exchange, then it would lead to huge change in points of injection and points of drawl resulting in change in normal flows in the grid leading to congestion, which is hard to predict and may jeopardise safe, secure and optimum grid operation. v) Short term power procured through bilateral agreement or day ahead purchase from Power Exchange cannot be rescheduled or surrendered within two days of scheduling, while long term power purchase can be rescheduled at any time from sixth time block. vi) Payment for power procured from Power Exchange is to be made in advance, while in case of power procured through long term PPA, payment is to made later (i.e. on credit). Thus procuring power from Power Exchange will result in extra cash burden on UPPCL which can lead to cash crisis affecting other critical activities. vii) Further UPPCL submitted that IEX proposal will benefit its business only and will not serve the purpose for UPPCL in getting firm power.on the other hand it will lead to higher prices in the Power Exchange. viii) UPPCL also submitted that if the suggestion of Power Exchange is acted upon, it will cause dispatch of power from generating station participating at the Power Exchange and creating a set of generating stations with un-dispatched surplus Page 3

capacity despite having long term PPA s with UPPCL. Therefore, this action of the Power Exchange is in the nature of the IEX forming a cartel with the generating companies who normally participate at Power Exchange and canvassing on their behalf for sale of spare capacity at their generating stations. In view of above,uppcl reached at the conclusion that the suggestion from IEX is aimed at boosting its own business and lacks predictability in regulation of power which will lead to increased prices in Power Exchange. Taking the above into cognizance, the Commission initiatedsuo-moto proceeding on the above matter. In the first hearing held on December 22, 2015, the Commission inquired about UPPCL not buying power from Power Exchange when the power was available at cheaper prices,whetherthe merit order is being followed and if so then why power from more expensive sources is being purchased when cheaper power is available in the Power Exchange. UPPCL in reply to this submitted that the power purchase from Power Exchangewas based on the following parameters:- 1. Only short term power was being purchased from the Power Exchange as only day ahead power was available. 2. Advance cash has to be deposited for such purchases and that UPPCL has severe cash flow problems. 3. There may be legal issues in case the long term PPAs are backed in lieu of the cheaper power available from the Power Exchange. The Commission after hearing all the stakeholders felt that UPPCL has not exploitedthe potential of the Power Exchanges at all, as there is no proper planning and execution. Commission s view in this matter as mentioned in the Order dated January 18, 2016 is reproduced below:- Also it was discussed that even if the supply schedule is organised on the basis of usualpower sources, a bid may be placed in the power exchange at a lower price and if the sameis cleared then the usual supply can be replaced by cheaper power from the exchange. It isnot clear why this cannot be done. If this was being done then UPPCL could savesubstantially in power purchase which is around 80% of its ARR and this effectively wouldlead to lowering of the consumer tariffs. The Commission also Page 4

felt that in case the meritorder was not being followed then it may create serious audit objections in the times tocome. The CMD, UPPCL had in one of the brain storming sessions held in the Commission s Office,had assured the Commission that UPPCL would soon be taking very positive and concretesteps to purchase as much power from power exchange as was available / possible at cheaper rates. UPPCL is directed to make a detailed submission on the action taken on thesepoints. The Commission then directed UPPCL to submit a detailed reply explaining month wise data ofpower purchased from various sources (with details of variable and fixed charges) vis. a vis.the prices prevailing duringthe same period in the Power Exchange leading to validation of theprinciple of merit order being followed in the power purchases made in FY 2015-16. The next hearing was scheduled on January 28, 2016 in which UPPCL submitted that the submissions to be made as per the direction of Commission in the previous hearing were almost ready but as there were some data related issues (inconsistencies / interpretations) to be addressed and requested for some more time to make the required submissions. The Commission taking the same into cognizance granted time extension and listed the matter to be heard on February 18, 2016.The Commission vide its letter dated February 15, 2016 rescheduled the date of hearing to February 24, 2016. UPPCL vide its Letter No. 360/CE/RAU/SPATC dated February 15, 2016 requested time extension of two weeks as the required information was still in compilation stage, however they were present along with their Advocate at the time of hearing. On the onset of the hearing UPPCL made its submission vide their affidavit dated February 23, 2016. UPPCL also submitted that data with regard to the backing of power for FY 2015-16 is under compilation and will be submitted shortly. In the affidavit dated February 23, 2016 UPPCL has submitted that the action of IEX approaching the Commission to exercise its jurisdiction through a Suo-Moto proceeding for sale of its power to UPPCL raises certain vital legal issues which the Commission may dispose of as preliminary objections to the maintainability of the Suo-Moto proceeding. Legal impediments taking cognizance of the letter of IEX dated May 26, 2015 as submitted by UPPCL are as follows:- i. The construction and structure of IEX as a creation of CERC does not permit the entity to invoke Regulatory powers of UPERC under section 86 (1) (b) of the Page 5

Electricity Act, 2003 for sale of its power to UPPCL without there being any agreement in place between IEX and UPPCL. UPPCL has also submitted that other than lobbying done by IEX through its letter dated May 26, 2015, there was no material before the Commission to question as to whether the Merit Order was being followed by UPPCL or not and the letter is clearly in violation of Regulation 53 (i) under part 7 Market oversight of CERC (Power Market) Regulations, 2010 which prohibits manipulative or attempted manipulative activity by IEX. ii. The Commission has failed to act as per the mandate contained in Section 86 (1) (b) of the Electricity Act, 2003 which provides:- regulate electricity purchase and procurement process of distribution licensees including the price at which electricity shall be procured from the generating companies or licensees or from other sources through agreements for purchase of power for distribution and supply within the State IEX is operating under a license granted by CERC under Section 12 of the Electricity Act, 2003 and is exclusively in jurisdiction of CERC. For any violation of Regulation 11 of the CERC (Power Market) Regulations, 2010 relating to the market design in case of day ahead markets route available to UPPCL, for bidding for power supply, the jurisdiction is vested with CERC only. For any grievance that UPPCL may have against the conduct of IEX, the Commission will not be the forum of redressal. Therefore, acting upon the letter from IEX without there being corresponding authority vesting in UPERC to proceed against IEX for any violation under the law makes it clear that the Commission does not have the adjudicatory jurisdiction to take cognizance of the letter of IEX dated May 26, 2015. UPPCL has further submitted that the analysis of the Commission contained in its Order dated January 18, 2016 regarding UPPCL in the matter of not exploiting the potential of Power Exchanges to supply comparatively cheap power is concerned, it has already made detailed submissions in its letter dated August 4, 2015 (as discussed above). Page 6

UPPCL has submitted that the offer of IEX in supplying cheap power if considered in isolation appears to be attractive but when it is seen under the purview of the PPAs signed by UPPCL to meet the requirement of supplying power to the consumers, inherently contingent nature of the offer of IEX with uncertainties doesn t remain a workable and viable offer. Backing down of power supplied under long term PPAs as and when the Power Exchange prices are lower than variable cost of power being purchased under long term PPAs, in experience of UPPCL doesn t seem to be a cost saving option. The PPAs entails obligation of UPPCL to pay fixed charges along with capital expenditure incurred by the generating companies in shutting down and restarting the plant. UPPCL also submitted that payment towards power purchased from generating companies under long term PPAs is made within 60 days of the actual supply of power whereas purchase of power from IEX on day ahead basis requires advance payment,for which sufficient balance is to be maintained in the bank account. The bid amount in cash would have to be deposited with the IEX a day before the outcome of the bid made by UPPCL. If the bid made by the corporation doesn t go through, cash amount deposited with IEX may remain locked for some time. Although it is a matter of actual calculation whether at a point of time the power purchase from IEX would actually be cheaper than the power being supplied to UPPCL under the long term PPAs upon power supplied from such generators being backed down, yet, in all probability, considering the long term interest of UPPCL and the policy pronouncement by the GoI, purchasing power from IEX on day ahead basis, as and when the exchange offers comparatively cheaper power, may not be a workable proposition. UPPCL has reiterated that its submissions made vide its letter dated August 4, 2015 which is a matter of record and hence have not been repeated here for the sake of brevity.in compliance to the direction provided in the Commission s Order dated January 18, 2016, UPPCL has submitted charts showing summary of approved power purchase cost for FY 2015-16 and charts showing energy charges and fixed charges of different power stations (Rs./ kwh) from the month of January 2015 to October 2015. In the hearing dated February 24, 2016 ShriAvadhesh Kumar Verma submitted that the fixed charge per unit paid by UPPCL for April, 2015 for certain private generating plants was very Page 7

high, to which UPPCL submitted that it is merely an issue of representation, the value was more because the plant was backed and very few units of power was supplied but full fixed cost was paid. UPPCL also submitted that sometimes when it bids for power (RTC) in the Power Exchange, it could not get power for a few blocks (1 Block is of 15 minutes) and hence it becomes operationally and technically difficult to ramp up generation from the existing power plants which have the ability to do so. Commission s Analysis: The Commission expressed its displeasure for the incomplete submission made by UPPCL in spite of having ample time for submission of the required information. The Commission also expressed its displeasure for the absence of key personnel / senior officers for representing UPPCL / SLDC in a matter of such importance. In reply to the bidding for purchase of low cost power from Power Exchange in the month of May, 2015, UPPCL submitted that it had not attempted bidding presuming that the required capacity will not be available from the Power Exchange and the price may rise due to increase in demand and hence making the choice unviable. UPPCL was also not able to give proper reply to the Commission s query regarding scheduling and backing of the other generating plant in the lean period. The Commission expressed deep concern in this regard and stressed that UPPCL / Licensees should not work on presumptions rather plan properly and schedule its power purchase from different sources to optimize the cost of purchase based on merit order principles thereby ensuring supply to its consumers at optimum cost. It is pertinent to mention here that UPPCL did not present any argument on the maintainability of Suo-moto issue as submitted by it in its affidavit dated February 24, 2016. The Commission also observed that the price of power available at Power Exchange for the month of May, 2015 was below Rs. 3.00 / kwh which is lower than the power obtained from long term PPAs by UPPCL. The main intention of the whole exercise was to examine that:- a) If the price of power at Power Exchange is above the variable charge paid to the power generators tied though the long term PPAs then purchase of power from Power Exchange will not be a viable option. Page 8

b) On the other hand if the price of power at Power Exchange is below the variable charge paid to the generators tied though the long term PPAs then efforts can be made for short term purchase of power from Power Exchange. It has also been observed by the Commission that in a letter dated August 4, 2015, UPPCL has submitted that in the month of April, 2015, UPPCL surrendered 1,499.27 MUs long term power to optimize power purchase cost. However in its affidavit dated February 23, 2016,UPPCL has submitted that it has surrendered 910.97 MUs in the month of April, 2015. UPPCL should provide proper justification for such discrepancy. The Commission directs UPPCL to submit complete information for power procurement during FY 2015-16 clearly explaining why they didnot explore the option of power purchase from the Power Exchange when the power was available at less than the variable cost of certain plants having long term PPAs with it. The Commission expects UPPCLto take advantage of current price scenario in the market and reduce its power purchase cost. UPPCL should indicate its plan about utilizing this opportunity of reducing the power purchase cost. Director (Commercial), Director (SLDC) should attend personally in the next hearing on April 6, 2016 at 11:30 Hrs. at the Conference Hall of the Commission. The desired information should be submitted within 15 days from the date of this Order. (S. K. Agarwal) (I. B. Pandey) (Desh Deepak Verma) Member Member Chairman Place: Lucknow Date:March 03, 2016 Page 9