Petition No.3 of 2007
Date of hearing: 26.02.2009
Date of Order: 06.03.2009

1. Punjab State Electricity Board (PSEB) filed this petition on 21.3.2007 under Section 86 (1) (b) of the Electricity Act, 2003 (Act) for approval of the Power Purchase Agreement (PPA) for purchase of 2x250 (+20%) MW of power from the Goindwal Sahib Thermal Power Station, Goindwal Sahib (Distt. TarnTaran) (GSTPS) to be developed by M/s. GVK Power (Goindwal Sahib) Ltd. Secunderabad (Developer/Seller).

2. The petitioner has submitted that M/s GVK Industries Ltd., Hyderabad (GVK) was first selected by the Government of Punjab (GoP) for setting up GSTPS on ‘BOO’ basis through a competitive bidding process and a Letter of Intent was issued in its favour on 18.5.1998 by GoP. The PPA was signed between the parties on 17.4.2000 after approval by GoP. GVK thereupon set up GVK Power (Goindwal Sahib) Ltd. as a special purpose vehicle to develop the project. The company obtained various clearances and an Implementation Agreement (IA) was signed by them with GoP on 25.8.2000. However, the project could not be implemented as IDBI, the main lender for the project, did not accept the escrow capacity of PSEB and the fuel supply agreement between the developer and Eastern Coal Fields Ltd. could not be finalized as price of coal was found to be higher when compared to the price at which coal was being received at other thermal plants of PSEB.
   
   
3. Thereafter, the Ministry of Coal (MoC) on the recommendation of GoP, allocated the Tokisud North Coal Block as a captive mine for GSTPS on 7.1.2002. The project still did not proceed further as the developer was unable to indicate the tentative cost of coal from the captive coal mine allocated for the project. At that stage, the Officers’ Committee on Projects of GoP in its meeting held on 26.7.2005 deliberated the matter and decided that PSEB may proceed to revise the MoU which besides providing for the commissioning schedule and tripartite payment security mechanism also stipulated that the tariff shall be subject to the approval of the Commission and be based on the principle that variable/fuel charges linked to coal cost will not exceed the cost as prevailing in the captive Pachhwara coal mine of PSEB and that fixed charges will not exceed the charges as worked out as per Central Electricity Regulatory Commission (CERC) norms.
   
   
4. A revised MoU was then signed on 8.2.2006 between M/s GVK Power (Goindwal Sahib) Limited and PSEB for reviving the development of GSTPS. The margin of up to 20% over the installed capacity was agreed by the parties to accommodate the standard sizes of power generating equipment available in the market with a view to economizing on the cost of the equipment. Subsequently, the developer filed an amendment to their petition no.4 of 2007 in which the capacity was revised to 2 x 270 MW from 2 x 300 MW as indicated in the PPA initialed between the parties in January, 2007. PSEB also filed an interim application for amending this petition to this effect. Accordingly, the contracted capacity of the project is now being reckoned as 2 x 270 MW.
   
   
5. In accordance with the terms of MoU, the Restated Power Purchase Agreement is to be signed between the two parties after approval of the Commission. It has been averred in the petition that the PPA initialed by the respective Chairmen of PSEB and GSTPS in January, 2007 and now submitted for approval is based on the guidelines of the MoP and norms of operation for Thermal Power Projects specified by CERC/State Grid Code.
   
   
6. The petition was fixed for its maintainability on 4.4.2007 when PSEB was also directed to clarify as to whether the PPA conforms to the requirements of the National Tariff Policy. After considering the submissions filed by PSEB on 24.4.2007 in this respect, the petition was admitted on 4.5.2007. The Commission after having taken into account the several submissions of PSEB on the question of conformance of the PPA with the National Tariff Policy and specially taking into account the clarifications dated 15.2.2008 given by the Ministry of Power, Govt. of India finally accepted, in its order of 15.10.2008, the request of the petitioner to consider the restated PPA for approval. Parallely, the petition was put to the public and a public hearing held on 22.8.2007 when the views of the PSEB Engineers’ Association and another objector were heard. The petition was thereafter fixed for hearing on its merits on 30.12.2008 and 6.1.2009. PSEB filed their final submissions on 23.1.2009 after which they were heard on 27.1.2009, 17.2.2009 and 26.2.2009.
   
   
7. The Commission observes that the restated PPA is based on the Standard PPA which is a part of the Guidelines issued by the MoP and it includes all the 18 articles of the latter but with substantial deviations. The Commission carefully perused the PPA and noticed that most of its articles have, after the amendments, lost their sanctity of purpose and no longer remain equitable. The deviations effected were brought to the attention of the petitioner who during the hearing contended that the PPA needs to be accepted by the Commission with all the deviations. It is argued that the risks associated and mitigation options reflected in the instant procurement are different as compared to a case where tariff based bids are invited. In the event of tariff based bidding, various clearances and approvals are put in place by the procurer before the start of the procurement process while in the instant case, the developer had undertaken all the risks connected with acquiring the land, approvals, fuel linkage, environmental clearances etc. It was further submitted that in the case of the petitioner, the original PPA was signed by both the parties on 17.4.2000 and the present amended and restated PPA is an improvement upon the original PPA, which is the result of negotiations with the developer. It is urged that this PPA should not be compared with the Standard PPA (of which only a draft was available at the time of signing of the PPA) when the procurement process in the case of the petitioner is entirely different.
   
   
8. Before discussing the significant deviations in detail, the Commission observes that the above contentions of the petitioner have little merit. Various clearances and approvals referred to by the petitioner were already in place before the PPA was initialed in January, 2007. GoP/PSEB offered full cooperation in acquiring the land and expediting the various statutory/non statutory clearances required for implementation of the project and as such there was no additional risk passed on to the developer at the time of negotiating and initialing the PPA in January, 2007. It also needs to be emphasized that the Government of India, Ministry of Power notified the Tariff Policy, 2006 and as per clause 5.1 thereof, all future requirements of power are to be procured competitively by the distribution licensee. Subsequently, exceptions were provided for the projects where appraisal was started before 6.1.2006 by the relevant financial institutions and the final PPA filed before the appropriate Commission by 30.9.2006. In such cases, a relaxation was provided in the tariff policy that power from such projects may be procured by the utilities without going through the competitive bidding process. However, the process of procuring power is still as per the Tariff Policy, 2006 and, accordingly, PPAs, even for such projects must conform to the Standard PPA formulated under the guidelines issued by MoP. The Commission further notes that the petitioner has drafted the PPA on the lines of the Standard PPA; it includes all the 18 articles as per the Standard PPA and thus the argument that the original PPA alone should be considered for comparison has no merit. The Standard PPA, which is a well balanced document and the result of collective efforts put in under the supervision of MoP, must be adhered to for procurement of power under the Tariff Policy, 2006 including the exceptions under this policy and any deviations can be considered only when those are absolutely necessary. In view of these considerations, the Commission holds that the Standard PPA is a benchmark for permitting any need based and necessary deviations provided these are equitable to the procurer and the developer.
   
   
9. In the light of the above conclusions, it is necessary to refer to some of the important clauses in the PPA where deviations from the standard PPA have been effected and the views of the Commission thereon. These are discussed hereunder:
   1. Performance Guarantee:
      The standard PPA provides that the performance guarantee in the form of a bank guarantee would be provided @ Rs.7.5 lakhs MW. In case conditions subsequent are not fulfilled, the above amount would increase weekly @ 0.375 lakh per MW. The PPA on the other hand has no provision for a performance guarantee and instead provides for a security deposit in the shape of a bank guarantee of the amount of Rs.3.9 crores. The petitioner has sought to justify the substantial difference between the amount to be provided in accordance with the standard PPA (Rs.40.5 crores) and that indicated in the PPA by referring to the higher risk associated in this case where the responsibility for providing land, obtaining clearances and fuel linkage has been passed on to the developer. Moreover, it is mentioned that the security deposit in the shape of a bank guarantee was agreed to on the basis of prevailing practices at the time of signing the original PPA. The Commission is of the considered opinion that the provisions of the PPA in this respect are highly inadequate. Given the fact that the actual risk of the developer in the matter of land acquisition, obtaining clearances and fuel linkage was actually much less, there appears to be no justification for this deviation.
      
      
   2. Liquidated Damages:
      The Commission observes that the charges payable as Liquidated Damages (LD) provided in the PPA are significantly less than the amount indicated in the standard PPA. Moreover, there is further provision in the PPA that levy of LD charges will begin after a gap of 5 months while there is no parallel provision in the standard documents. The petitioner has clarified that the rates indicated in the charges are those which were stipulated in the bidding documents in 2006. The levy of liquidated charges after 5 months is justified on the ground that the security deposit of Rs.3.9 crores would be appropriated @ 20% per month and LD charges would become payable thereafter. The Commission is of the view that LD charges as per the standard PPA appear fair and equitable and need to be provided for accordingly. There is little justification for taking into account the bank guarantee of Rs.3.9 crores which is being referred to both in respect of performance guarantee and liquidated damages.
      
      
   3. Performance Test:
      The standard PPA provides for that as many as 8 re-tests can be taken in a period of 180 days while the PPA allows a maximum of 5 tests in the period of 360 days. The Commission is of the view that capacity at which the generating units are operating should become known to the procurer as early as possible and that provisions as per the standard PPA need to be retained.
      
      
   4. Tested Capacity in excess of Contracted Capacity:
      The Commission observes that the standard PPA provides for excess capacity, if any, to be offered to the procurer while the PPA permits the seller to dispose off such capacity to a third party. The petitioner has justified this by stating that PSEB has assured contracted capacity available at all times and can purchase in excess of tested capacity if it chooses to do so. The Commission is of the view that the provisions in the standard PPA are fairer and need to be retained.
      
      
   5. Reduction in Capital Cost due to De-rating:
      The Commission finds that the PPA does not provide for proportionate reduction in capital cost in the event of generating units being derated. The petitioner has argued that the interests of the procurer are effectively safeguarded when derating results in proportionate reduction in contracted capacity. The Commission notes that there is a significant deviation in the PPA in so far as there is no provision for proportionate reduction in each element of capital cost which is specifically provided in the standard PPA. Accordingly, the Commission does not find any justification for this deviation.
      
      
   6. Adjudication by the Commission:
      Several articles of the standard PPA provide for an adjudicatory role of the Commission in the event of disputes between the seller and the procurer while the PPA nowhere provides for such a role by the Commission. However, in one of their subsequent filings the petitioner has agreed, taking into account a recent Supreme Court judgment, to suitably provide for the adjudication by the Commission, wherever required. Accordingly, the Commission concludes that clauses in the standard PPA where such a role is defined need to be suitably incorporated.
      
      
   7. Appointment of an Independent Engineer:
      The standard PPA provides that an independent engineer will be jointly appointed by the procurer and the seller whereas the PPA stipulates the appointment of the independent engineer by the procurer who will also bear the cost. The petitioner has supported the amended stipulation on the ground that it is to the benefit of the procurer. That notwithstanding, the Commission is of the view that an independent engineer should be jointly appointed and paid for by both parties so as to uphold and strengthen the impartial image of such an agency.
      
      
   8. Articles 7 and 9:
      The Commission observes that there is no need for any further elaboration of articles 7 (Operation and Maintenance) and article 9 (Metering and Energy Accounting) as the standard PPA provides that these aspects shall be governed by the provisions of the Grid Code, the Central Electricity Authority (Installation and Operation of Meters) Regulations 2006 and the principles of Availability Based Tariff. Since the above mentioned rules and regulations are already notified, it is neither necessary nor desirable that further elaboration be made in respect of these technical matters in addition to what is already stipulated therein. Accordingly, the provisions of the standard PPA need alone to be retained.
      
      
   9. Article 14:
      The Commission observes that the standard PPA does not provide for a buy-out option in case of a persistent default on either side. It is evident that in providing substitution rights of the lenders, the standard PPA seeks to give them a measure of comfort. However, it may be advantageous, at the same time, to further provide for the eventuality of a buy-out as has been indicated in the PPA. The Commission accordingly observes that both parties might like to explore the possibility of providing an appropriate and equitable buy-out clause in addition to this article which may provide greater flexibility in case the lenders are unable to find a suitable selectee as provided in the standard PPA.
      
   
   
10. Coal Cost: The petitioner has indicated that a captive coal mine (Tokisud North) has been allocated for GSTPS by the Ministry of Coal on the recommendation of GoP/PSEB. As per decisions taken in the meeting of the Officers’ Committee on Projects held on 26.7.2005, the fuel charges linked to coal cost are not to exceed the cost as prevailing in the PSEB’s existing Pachhwara captive coal mine. The Commission observes that the coal price of the Pachhwara coal mine determined on the basis of percentage of discounts on the Coal India Ltd. price for different categories of coal can not automatically be adopted for another mine where geographical and other features may be different. The Commission is, therefore, of the view that adoption of coal cost of the Pachhwara mine indicates the maximum price at which coal would be supplied to GSTPS. However, the possibility that cost of fuel from the captive coal mine of GSTPS may actually be lower needs to be explored. Accordingly, the Commission is of the view that there is a need to devise a judicious method of arriving at the cost that will actually be supplied from Tukisud North. The Commission directs that the developer will in association with the procurer resort to a competitive bidding process, preferably international both for developing and operating the captive coal block allocated to GSTPS and any lower cost emanating as a result of this exercise shall form part of the mining agreement and be adopted for the purposes of working out the variable (fuel) charges.
    
    
11. The Commission observes that the standard PPA includes 17 schedules of which several are relevant only in a case of competitive bidding and multiple procurers. The PPA on the other hand includes 7 schedules which are common and another 5 which find no mention at all in the standard PPA. After taking into account the need and relevance of these schedules, the Commission directs that Schedule 1A (Site), 2 (Initial Consent), 4 (Functional Specification), 5 (Commissioning and Testing), 6 (Availability Factors), 7 (Tariff), 8 (Details of Inter-connection Point and Facilities), 10 (Representation and Warranties), 15 (Format of the Performance Guarantee) and 17 (Substitution Rights of the Lenders) shall be retained in the PPA allotting them serial numbers from 1 to 10. Further schedule 11 of the PPA will pertain to the estimates of project capital cost as approved by the Commission. In case the parties are able to reach an agreement on a suitable buy-out clause, schedule for the same be provided as Schedule 12. However, other schedules included in the PPA such as those for Metering System, Calculation of Fuel Consumption, Price of Coal and Weighted Average GCV and Draft Format of the Tripartite Escrow Agreement will not form a part of the final PPA. The Commission also clarifies that:
    
    1. The schedule for Tariff shall clearly mention that the tariff will be determined by the Commission when the application for the same is received from the developer at the appropriate time.
       
    2. All clauses in the schedule for Tariff as per the standard PPA shall be retained (except clause 1.2.2 and 1.2.3 applicable in the case of tariff based bidding) including proviso under 1.2.2.
       
    3. In the schedule for Functional Specification, ramp rates (clause 1.3) will be retained as per stipulations in the standard PPA. This clause will be further customized to the satisfaction of the procurer taking into account the plant type and the relevant provisions of the Grid Code.
       
    4. Language of schedules pertaining to Commissioning and Testing, Availability Factors, Representation and Warranties, Format of the Performance Guarantee and Substitution Rights of the Lenders will be retained as per the standard PPA.
       
    5. If so required and agreed, the schedule pertaining to details of Inter- connection Point and Facilities may be kept as per the PPA.
       
    
    
12. In the light of observations in the foregoing paras, the Commission directs that all articles of the PPA initialed between the parties including the definitions be finalized as per the standard PPA excluding references made to multiple procurers or the bidding process wherever occurring as these are not applicable and incorporating permitted deviations. However, the definition of Project and Captive Coal Mine may be retained as per the PPA. The Schedules shall be drawn as discussed in para 11 and keeping in view the clarifications elaborated therein.