Petition No.10 of 2008
Date of hearing: 8.7.2008
Date of Order : 06-08-08

      M/s GVK Power (Goindwal Sahib) Ltd., (GVK) has filed this petition under Section 94 (1) (f) of the Electricity Act, 2003 read with Regulation 64 of the Punjab State Electricity Regulatory Commission (Conduct of Business) Regulations, 2005 for review/clarification/modification of Order dated 29.4.2008 passed by the Commission in petition no.4 of 2007. The prayer for review has been made stating that a copy of the Central Electricity Authority’s report, whose advice was sought by the Commission on ‘in principle’ acceptance of the estimates of project capital cost and financing plan, was not supplied to the petitioner. The Commission notes that earlier, clarifications had been sought from the review petitioner on issues highlighted in the CEA’s report and a detailed reply was received on 15.4.2008 which was duly considered while passing the Order dated 29.4.2008. However a copy of the said report has now been forwarded to the petitioner. This petition was heard on 8.7.2008 when representatives of PSEB were also present. The arguments put forth by the petitioner and the issue-wise findings of the Commission thereon are discussed in the succeeding paras:

1. Boiler, Turbine and Generator (BTG)
   
   The main points raised by the petitioner relate to the exchange rate, price variation formula and exclusion of cost of spares. It has been mentioned that a part of the contract price is to be paid in Rupees equivalent to Euro and Dollars and that the total contract price had been worked out assuming a given exchange rate between the Rupee and the Euro/Dollar but contract price variation as a result of fluctuations in the exchange rate have not been taken into consideration by the Commission. A similar argument has been given in respect of the price variation formula where the petitioner has urged that increase in the contract price upto the time when the notice to proceed (NTP) is issued had to be taken into account which the Commission did not take note of. As regards spares, it is mentioned that the cost of the recommended spare parts has not been included in the total BTG cost.
   The Commission notes that the contract price in the LOI placed on BHEL for the BTG package is payable only in Indian Rupees and the exchange rates for the Euro/US Dollar will be as applicable on the date of payment. It is also evident that the estimates of project capital cost have been worked out taking into account an exchange rate of Rs.57.50 and 41.00 for the Euro and Dollar respectively. The same rates have also been mentioned in the petitioner’s filings of 13.8.2007 and 8.12.2007. The Commission observes that exchange rates taken into reckoning by the petitioner and accepted by the Commission are only for the purpose of ‘in principle’ acceptance of estimates of the project capital cost and any change therein would clearly need to be taken note of at the time of subsequent tariff determination. The same position holds good in respect of the issue of variation in the contract price till the NTP is issued. The Commission has accepted a cost of Rs.1070.58 crores (inclusive of taxes and duties) based on competitive bids that had been invited and if this cost escalates upto the time when the NTP is issued then that aspect would necessarily be an issue for consideration when actual tariff determination takes place after the commissioning of the project.
   The Commission observes that there is no provision for spares in Annexure VI of the petition where project costs have been detailed. In a subsequent submission dated 13.8.2007, the petitioner while providing the breakup of capital cost indicated initial spares as being a part of the total engineering, procurement and construction (EPC) costs. In the LOI placed on BHEL for BTG {clause 1 (iv)}, it is provided that itemized spares as recommended by BHEL for 3 years operation of the plant are to be ordered separately. In another submission dated 16.1.2008 (para 7), the petitioner mentioned that initial spares are not included in the LOI placed for the BTG package.
   It is evident that the petitioner has not made any clear and unambiguous statement as to whether any category of spares is a part of the LOI issued. However, relying on the LOI placed on the BHEL for the BTG, it appears that initial spares are included as a part of the BTG package specially when there is a clear indication in clause 1 (iv) that itemized spares as recommended by the BHEL for 3 years operation of the plant are to be ordered separately. In the circumstances, the Commission concludes that cost of initial spares has already been catered for and no further provision on this account is warranted at this stage.
   
   
2. Balance of Plant (BOP)
   
   The petitioner has in this context argued that the Commission has failed to take into account the cost of spares in the BOP package. The Commission observes that there is no separate mention of spares in Annexure VI where itemized project costs have been brought out nor is there any reference to this in the LOI placed on M/s Punj Lloyd Ltd. In their submissions of 16.1.2008, the petitioner has mentioned that mandatory spares are included in the BOP cost and it is only in their final submissions of 15.4.2008 that it has been indicated that the BOP cost package of Rs.1005 crores does not include the cost of spares. It is evident that as in the case of BTG, the petitioner has not brought out spares as a separate item of cost right upto 15.4.2008 nor has any clarification been given as to what constitutes mandatory or initial spares. Significantly, there is also no mention of spares in the LOI. In the circumstances, the Commission is inclined to hold that the cost of initial spares has been provided for and there is no occasion for making a separate provision on this account. For these reasons, the Commission sees no reason for deviating from its findings in the Order of 29.4.2008.
   
   
3. Site grading and Ash pond development costs
   
   The petitioner’s main contention is that full costs on account of site leveling/grading and expenses for providing a flood protection embankment and development of ash pond have not been allowed by the Commission. The Commission observes that Annexure VI of the petition which brings out the estimated project cost has no separate provision for site grading and ash pond development. In submissions of 13.8.2007, the petitioner while providing the break up of capital cost indicated ash disposal area and site development as part of the non EPC and site development costs respectively. Again, in the petitioner’s filings of 8.12.2007, site grading, site drainage and ash pond etc. were intimated as part of the non EPC works with site specific features having been clearly outlined giving reference to high quantum of back filling, non availability of adequate back fill material and need to provide impervious lining of ash pond etc. The fact that development of the ash disposal site would be covered under the scope of non EPC works is again confirmed in the petitioner’s submissions dated 16.1.2008. Quite evidently, such costs were known and had been initially factored into the estimates of project capital cost. It is only at the penultimate stage that the petitioner had, in their submissions of 15.4.2008, indicated (without any supporting data) that Rs.49 crores is being separately provided for site grading and ash pond development. It is also necessary to recall that in the petitioner’s filing of 16.1.2008, it was unambiguously confirmed that total contract price would not exceed Rs.2987.86 crores and this included a total of Rs.86 crores as non EPC component. In the circumstances, it is reasonable to assume that all site development costs including grading, leveling and ash pond development and construction of protection embankment are a part and parcel of non EPC and site development works and that a claim of an additional Rs.49 crores on similar works is untenable and clearly an after thought.
   
   
4. Start up expenses
   
   The petitioner claims that disallowance of Rs.15 crores on account of start up expenses is not justified as the power procurer will only reimburse the cost of coal and fuel oil used for generation of infirm power supplied to it but not the other costs involved, details of which have been furnished in the petitioner’s filing of 15.4.2008.
   It is not disputed that revenues accruing from the sale of infirm power will become available to the petitioner for defraying costs on account of start up expenses. From the details provided in the submissions of 15.4.2008, the Commission notes that cost of coal and fuel constitute almost the entire start up expenses claimed. As these expenses are admittedly going to be met by the power procurer, the claim as per the petitioner’s own submission gets reduced to a minuscule amount which has no significant bearing on the totality of costs for a project of this magnitude. The Commission, accordingly, does not find sufficient justification in the claim for allowing the start up expenses.
   
   
5. Expenses towards power and water for construction
   
   The petitioner has submitted that these costs are to be incurred for the development of infrastructure for power distribution and the cost of energy and water on works not included in the main packages. It has been further clarified that PSEB will make power available at site at 33 KV or above and that a sub station would be developed to step down the voltage to 11 KV and also provide internal distribution of power.
   The Commission notes that the provision of Rs.12 crores in the estimates was for construction power and water charges. Even in the break up of the cost, provided for the first time by the petitioner in its filing dated 15.4.2008, the major portion is for defraying the construction power and water charges. Such expenses for BTG and BOP works are to be paid by the respective suppliers/contractors, as provided in their respective LOIs. As regards creating infrastructure for these facilities and payment of such charges for non EPC works, the same are covered in the non EPC estimates. Accordingly, the Commission finds no reason to change its earlier decision on this issue.
   
   
6. Pre-operative expenses
   
   The petitioner has contended that a reasonable estimate of Rs.50 crores on pre-operative expenses had been made but the same has been severely curtailed by the Commission. It is noted that such expenses are to be incurred largely for administrative and supervisory costs during the course of executing the project. It has also been observed that major portion of the total works are included in the BTG, BOP and non EPC works packages, leaving only a very small quantum of work that need to be directly supervised by the petitioner. It is true that acceptance of such costs would ultimately be subjected to a prudence test when tariff determination is to take place but this can not be construed as to mean that the reasonability of such expenses is not to be gone into at this stage. The Commission has already held that Rs.15 crores would be sufficient to meet the costs in this respect and it does not see any reason to arrive at a different conclusion now.
   
   
7. Interest during construction (IDC)
   
   The petitioner has submitted that the Commission has reduced the claim of IDC by adopting a different method of calculation. Even when a debt equity ratio of 80:20 has been allowed by the Commission, the IDC calculation in the impugned order assumes that the petitioner will bring in 50% of the total equity before drawing upon any installment of the loan. On the other hand, the petitioner proposes to initially bring in 30% of the total equity which is in line with the financing requirements. The petitioner has further submitted that drawdown of debt takes into account the supply schedule as provided in the EPC and non-EPC contracts while that for other expenses is based on estimates. It has been argued by the petitioner that as IDC will eventually form a part of the project cost based on the actual amount spent, the amount claimed should be accepted at the stage of granting ‘in principle’ approval.
   The petitioner has rightly observed that IDC is likely to form part of the project cost based on the actual amount spent on IDC. Since the petitioner had not furnished any details in respect of the supply and construction schedule for EPC as well as non EPC works, phasing of expenditure by the Commission in its Order of 29.4.2008 was presumptive and based on historic considerations and industry practice. IDC as per actuals would be considered at the time of tariff determination except where reasonableness of such cost is not substantiated. Accordingly, for the purpose of ‘in principle’ approval of the estimates of project capital cost, phasing of expenditure adopted by the Commission is in Order. As regards the upfront equity contribution by the petitioner to be expended before any installment of the loan is drawn, the Commission has no objection if the petitioner brings down the same to any value between 30% to 50% (in place of 50% taken in the Order dated 29.4.2008), provided the petitioner can manage additional term loan without any extra cost to the project capital cost estimates, on this account. The Commission further observes that all the other pleadings made in the review petition were already on record and have been considered before passing the Order dated 29.4.2008 and there is no patent error of law or fact therein that warrants review of the IDC cost as approved by the Commission.
   
   
8. Contingency
   
   In the review petition, it is stated that contingency totaling 66.85 crores has been worked out as 3% and 2.10% on EPC and non EPC works respectively to meet any unforeseen increase in the project cost. It is further stated that the financial closure will not be possible if the contingency reserve is not allowed as financial institutions insist that the project should have suitable amount of contingency as part of the proposed capital cost.
   The Commission had given careful consideration to the submissions of the petitioner in earlier filings as well as in the review petition and notes that it had in the order of 29.4.2008 held that a provision for contingencies has already been made in the BTG, BOP and non EPC work packages which leaves works amounting to Rs.51 crores for which contingency needs to be provided and Rs.5 crores for this purpose as already provided appear to be sufficient. There is nothing in the arguments preferred by the petitioner at this stage which rebuts the findings of the Commission and accordingly there is no occasion for reconsideration of the same.
   
   
9. Financing charges
   
   The petitioner has urged that letter of credit (LC) charges are a part of the financing charges as payment security mechanism for the EPC and non EPC contracts. A copy of letter from the IDBI Bank dated May 8, 2008 showing the LC commission that would be charged has also been filed. It is further stated that the provision for financial advisory fees @ 1% of the debt is based on supporting documents filed as Annexure-8 of submissions dated December 8, 2007. The petitioner’s prayer is to allow financing charges at Rs.70 crores inclusive of LC commission of Rs.31.80 crores and financial advisory fees @ 1% of the debt.
   The Commission has carefully gone through the pleadings in the review petition and observes that similar submissions had been made earlier which were considered by the Commission while deciding this issue in Order dated 29.4.2008. The letter of May 8, 2008 from IDBI submitted alongwith the review petition has been obtained subsequent to the Order and was not on record at the time of passing the Order. In any case, this pleading of the petitioner was taken into account while deciding the issue of allowing financing charges. As regards financial advisory fee, the same was not allowed as there was no document to substantiate this claim attached with Annexure 8. For all these reasons the Commission, even after reconsidering the submissions of the petitioner, is unable to find any additional justification in allowing increase in the financing charges.
   
   
10. Working capital margin (WCM)
    
    It is stated in the review petition that it is necessary that margin on working capital is funded with long term funds and should be included as a part of the project cost. It is further stated that the Central Electricity Regulatory Commission (CERC) while granting ‘in principle’ approval in the case of Essar Power Limited has allowed working capital margin of Rs.60.37 crores in the Order dated August 2, 2006. Therefore, working capital margin should be allowed as a part of the capital cost.
    The Commission is of the view that cost of working capital margin forms a part of the Annual Revenue Requirement and is not a part of the project cost. The pleadings of the petitioner that CERC has included working capital margin in the project cost is not substantiated from a careful reading of the Order in the case of Essar Power Ltd. The per MW cost of Rs.2.52 crores approved by the CERC in para 17 of its Order has been taken from para 8 thereof where the same has been worked out by excluding the working capital margin. The mention of ‘including Working Capital Margin of Rs. 60.37 crore’ in para 17 of the ibid Order also appears to be anomalous because after including this amount in the capital cost, the per MW cost exceeds Rs.2.52 crores approved by CERC. Moreover, in an immediately succeeding Order dated August 22, 2006, CERC has, in the case of Torrent Power Generation Limited, clearly held (para 11) that as per its Regulations of 2004, working capital margin is not a part of the capital cost. Accordingly, the Commission reiterates its earlier findings on this issue.
    The Commission observes that ‘in principle’ approval can, at best, provide a rough estimate of project costs and that these would necessarily have to be fine tuned at a subsequent stage after the project has been completed. It is relevant in this context to note that Regulation 17 of the CERC (Terms & Conditions of Tariff) Regulations 2004 alongwith subsequent amendments clearly stipulates that the actual expenditure incurred on completion shall, subject to a prudence check by the Commission, form the basis for determining final tariff and that ‘in principle’ acceptance of estimated project cost and financing plan will only be the guiding factor for applying a prudence check on the actual capital expenditure. Accordingly, even on review, the Commission upholds the ‘in principle’ approval of the estimates of the project capital cost as already allowed in Order dated 29.4.2008.