Petition No.11 of 2006
Date of order: 24.1.2007

In the matter of:

Petition for approval of Power Sale Agreement dated 23.03.2006, signed between PSEB and Power Trading Corporation India Ltd, New Delhi (PTC) for purchase of power from Malana-II, Hydro Electric Project and determination of tariff and related matters.

In the matter of:Punjab State Electricity Board, The Mall, Patiala
Present:Shri Jai Singh Gill, Chairman
Smt. Baljit Bains, Member
Shri Satpal Singh Pall, Member

In exercise of the powers vested under Section 86 of the Electricity Act 2003, the Punjab State Electricity Regulatory Commission, having considered the petition, written submissions and other documents filed by the Punjab State Electricity Board, passes the following order on this petition.

    1.1      The Punjab State Electricity Board (PSEB), filed this petition on May 10, 2006 before the Punjab State Electricity Regulatory Commission(Commission) seeking approval, of Power Sale Agreement (PSA) dated March 23, 2006 signed between PSEB and PTC India Limited, New Delhi (PTC), a Company having license for trading in Electricity, and incorporated under the Companies Act, 1956, having its registered office at 2nd Floor, NBCC Tower, 15, Bhikaji Cama Place, New Delhi - 110066, in connection with supply of power from the 100 MW Malana-II Hydro Electric Project (Project) in District Kullu, Himachal Pradesh being developed by M/s Everest Power Private Limited (Developer).

    1.2      The Commission has noted that the Project for which the PSA has been signed between PSEB and PTC is a run of the river project with limited pondage. Further, in terms of the Power Purchase Agreement (PPA) signed between PTC and the Developer, dated July 25, 2005, the Developer has to supply 12% of the energy output for the first twelve years from Commercial Operation Date (COD) and 18% of the energy output from the start of the thirteenth year till the end of the term of agreement free of cost to the State of Himachal Pradesh (or the Project State Utility as defined in PPA).

    1.3      The Commission has undertaken the examination and the approval of the PSA filed by the Petitioner in accordance with and in exercise of the powers vested in it under Section 86(1)(b) of the Electricity Act 03 (EA 03). This section requires the State Commission to 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. The Commission has also referred to Section 86(4) of the EA 03 which enjoins that the State Commission shall in this respect be guided by the National Electricity Policy (NEP), National Electricity Plan and Tariff Policy published under Section 3 of EA 03.

  1.       Competitive Procurement of Power

    2.1      The EA 03 enjoins that a State Commission shall, in discharge of its functions, be guided by the National Electricity Policy, National Electricity Plan and Tariff Policy published under Section 3. The Tariff Policy clearly specifies that all future requirement of power is to be procured competitively by distribution licensees. The Commission has thus considered it necessary to examine whether the power procurement by PSEB via this PSA is as per requirements of the Tariff Policy. The Commission has referred to the clarification sought by the Central Electricity Regulatory Commission (CERC) from the Ministry of Power (MoP) on the applicability of competitive procurement of power by distribution licensees as provided for in the Tariff Policy. MoP has clarified that generation projects which satisfy any of the following conditions would be deemed to be within the provisions of the Tariff Policy:

    1. Where the Power Purchase Agreement (PPA) has been signed and approved by the Appropriate Commission prior to 6.1.06 or PPA has been signed and is pending before the Appropriate Commission on 6.1.06, such procurement would be treated as falling outside the scope of clause 5.1 of Tariff Policy as contractual obligation for procurement of power has been firmly established in such cases.
    2. Similarly, where the appraisal of any power project has started before 6.1.2006 by the relevant financial institutions for lending funds to the project on the basis of appropriate evidence of process of procurement of power by any utility, such procurement would be treated as falling outside the scope of clause 5.1 of the Tariff Policy provided that in all such cases final PPA is filed before the Appropriate Commission by 30th September, 2006.
    3. In case of hydro projects where detailed project report (DPR) has been submitted to the CEA/CWC before 6.1.06 for concurrence (except for projects where concurrence of DPR is not mandatory) and appropriate evidence of process of procurement of power by any utility exists before 6.1.2006, such procurement would be treated as falling outside the scope of clause 5.1 of Tariff Policy, provided that in all such cases the final PPA is filed before the Appropriate Commission by 30th September, 2006.

    2.2       The Commission notes that Rural Electrification Corporation Limited (REC) has intimated that the project was posed to it for funding in 2003 and funding arrangements were finalized in 2004. The project is covered under the exception brought out in para 2.1 above. It may also be noted that the word ‘utility’ used in the above mentioned condition has to be interpreted to include an entity such as PTC which in turn sells the power to a distribution utility.

    2.3       The Commission also observes that the final PSA between PTC and PSEB for sale of power from this project has been filed before the Commission by September 30, 2006. The said PSA is accompanied by a copy of the PPA signed between PTC and the Developer. The Commission accordingly holds that taking into account the clarifications issued by MoP, the PSA signed between PTC and PSEB for sale of power, from this Project is covered under the provisions of Tariff Policy regarding procurement of power.

    3       Examination Process of PSA

    3.1       The salient features of the PSA submitted for the Commission’s approval are as under:-

    1. Date of Execution of the PSA- March 23, 2006
    2. Location of the Power Generating Station – Mallana, District Kullu, Himachal Pradesh.
    3. Contracted Capacity –100 (2X50) MW of net electrical power output at the Delivery Point, Power Grid Corporation of India Ltd (PGCIL) Busbar at Panarsa, H.P
    4. Design Energy - 412.11 Million Units/year out of which 12% free power will be given to the State of Himachal Pradesh during the first twelve years and 18% free power thereafter
    5. Capped Tariff - Rs 2.64/kwh in first five years after Commercial Operation Date (CoD), Rs.2.47/kwh from the sixth to eleventh year of CoD and Rs. 2.31/kwh from the twelfth to the fortieth year.
    6. Term of the PSA - 40 years after CoD. The PSA will come into force only after approval is granted by the PSERC
    7. Expected date of Commissioning– March 2009 revised to June 2009.
    8. Hydrology Risk - Taken up by the generator with a cumulative carry-over procedure
    9. Payment Security Mechanism - Either Letter of Credit or Escrow facility on the receivables of PSEB.

    3.2       The petition filed by PSEB for approval of the PSA between PSEB and PTC for purchase of power from the Project was taken up for admission on May 24, 2006. The representative of PSEB requested the Commission to allow filing of additional information to form part of the petition, which was acceded to by the Commission. After issuing a public notice inviting objections, a public hearing on the petition was held on June 27, 2006 when no objections were received. PSEB again filed additional information on July 5, 2006 which was taken on record.

    3.3       The approach followed by the Commission in examining the PSA included an examination of the following key issues which are set out in the following paragraphs of this order:

    1. Need for power
    2. Scope of Approval
    3. Cost of Power Purchase
    4. Trading Margin
    5. Dispute Resolution Mechanism
    6. Term of the PSA
    7. Consequences of Default and Termination

    3.4       Need for Power

    3.4.1       In this regard the Commission has taken note of Petition no.9 of 2005 filed by PSEB, for approval to procure 1000 MW of power on a long term basis, in order to initiate the bidding process as per the guidelines issued by Ministry of Power which the Commission has approved in its order dated April 10, 2006. As per the submissions made by PSEB in this petition, the peak demand for power in FY 2011-12 is expected to go up to 13582 MW (draft 17th EPS), as against the peak demand of 10801 MW (16th EPS). As per projections in the draft 17th EPS , the deficit of power in Punjab for FY 2009-10, 2011-12 would be of the order of 3463 MW and 4941 MW respectively as against the deficit of 1611 MW and 2160 MW referred to in the 16th EPS. However, PSEB has now submitted data from 3rd draft of 17th EPS, whereby the projection for the peak demand for FY 2011-12 has been scaled down to 11000 MW, thereby reducing the deficit to 2359! MW.

    3.4.2       While scrutinizing the Annual Revenue Requirement of PSEB for 2006-07, the Commission had noted that the sale of power within Punjab has increased at a Compound Annual Growth Rate (CAGR) of 4.98% between FY 2004-05 to FY 2006-07 (projected), despite the restrictive conditions imposed on consumption. Thus the actual demand for power is much more than the present availability of power. PSEB data also indicates a growing energy deficit both during normal as well as peak supply hours. The peak deficit was 6.7% in 2002-03 but rose to 20.3% in 2005-06. Similarly, overall energy deficit which stood at 5.9% in 2002-03 went up to 8.7% in 2005-06, while deficits in the current year are still higher.

    3.4.3       PSEB’s own generation has remained static at 3276 MW since FY 2000-01. The power available to the State from BBMB was 1315 MW in FY 2000-01 and increased marginally to 1327 MW in FY 2004-05 which has now declined to 1258 MW. The absence of capacity addition by PSEB in the past few years and the reduction in power available from BBMB implies that PSEB has been significantly dependent on the power allocated from the central sector. PSEB’s allocation of power from the central generating stations has increased marginally from 1127 MW in FY 2000-01 to 1630 MW currently. Given the shortage of power within the state, the capacity available to PSEB including the share from central generating stations has not been sufficient to meet the demand for power within the state and the Board has increasingly relied on traded power to meet the demand for power within the state. With little capacity addition envisaged in the state sec! tor in the near future, PSEB hopes to source power from projects in the pipeline for which it has entered into agreements to procure power.

    3.4.4      In this scenario, it would not be unreasonable to assume that the shortage of power would have to be met to a significant extent by traded power. It is well known that the prices of traded power have consistently shown an upward trend over the years which are an indicator of increasing shortages and reduced elasticity of demand as a result of economic development and growing population. Thus, with the growing shortage of power in the foreseeable future, the prices of traded power will also increase impacting on the power purchase cost of PSEB as well. Moreover, delays in the execution of power projects and sub-optimal generation from existing plants may further increase the projected deficit of power. On the other hand the Commission notes that NEP mandates the States to ensure that the demand for power is fully met by 2012 with no energy and peak shortage and availability of adequate reserves. Anticipated demand nee! ds to cater for higher economic growth rate projections so that lack of electricity does not constrain growth. In light of the above, the Commission is satisfied of the need to procure power from this project by PSEB.

    3.5      Scope of Approval

    3.5.1       In this petition, PSEB has requested the Commission to approve the PSA signed between PSEB and PTC. As mentioned earlier in this Order, the Commission has undertaken the examination and approval of the PSA under Section 86(1) (b) of the EA 03. This section empowers the Commission to regulate the 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.

    3.5.2       In light of the above provision of the EA 03, the Commission is not required to approve the entire PSA but only limit its approval to aspects of the purchase and procurement process including reasonability of price and the conditions on which electricity is being procured by PSEB from PTC.

    3.6      Cost of Power Purchase

    3.6.1 In accordance with the Punjab State Electricity Regulatory Commission (Conduct of Business) Regulations, 2005, the Commission has to ensure that power purchase by PSEB is undertaken in an economical manner and at a fair and reasonable price. The Punjab State Electricity Regulatory Commission (Conduct of Business) Regulations, 2005 state as under:

    Clause 46 (1): In accordance with the provisions of the Act and the Licence conditions, every Distribution Licensee shall purchase and procure electricity required for the Licensed Business of the Distribution Licensee in an economical and efficient manner and under a transparent power purchase and procurement process and generally based on the principles of purchase of electricity at the least cost.

    46(4a): The Distribution Licensee shall satisfy the Commission as to the need for additional power procurement on a long term basis.

    46(6a): The Distribution Licensee shall satisfy the Commission that the electricity procured under long term power purchase otherwise than through a competitive bidding process or any short term power purchase is economical in the prevalent circumstances and that the Distribution Licensee has made prudent and best efforts to minimise the cost of purchase.

    3.6.2      The Commission has noted that the PSA specifies a capped tariff for purchase of power by PTC and the trading margin to be charged by PTC as under:
    Capped TariffPTC’s Trading Margin
    Tariff Years 0-5             - Rs.2.64 /unitTariff Years 1-12           - Rs.0.05 /unit
    Tariff Years 6-11           - Rs.2.47 /unitTariff Years 13-40         - Rs.0.10 /unit
    Tariff Years 12-40         - Rs.2.31 /unit 

    3.6.3       The PSA also specifies that tariff for purchase of power by PSEB under this PSA would be based on financial parameters as mentioned in clause 10.1 of the PSA but tariff payments would be capped as specified in the PPA. While examining the Merit Order Schedule of PSEB, the Commission has compared the cost of landed power for all sources of power from which the Board is currently purchasing power or proposes to do so in the future and has compared the same with the cost of landed power from this project. While doing so reasonable escalation factors have been taken into consideration. The Commission is of the view that it may not be possible to project the merit order schedule, for an inordinately long time frame, owing to the uncertainties involved in the sector as well as in the functioning of the plants. Accordingly, analysis of the Merit Order over a period of 20 years only has been attempted and is availa! ble at Annexure-A.

    3.6.4       An analysis of the merit order reveals that the cost of power from this project falls well within the present as well as future merit order stack of power to be procured by PSEB from different sources. From the data furnished by PSEB, the Commission has also taken note of the fact that for nearly half the year, this hydel project will be able to function as a peaking station during peak load hours, when the requirement of power is much more than other hours of the day and the cost of power is also substantially higher. For the remaining part of the year this Project would be supplying power to PSEB around the paddy season which again is the period of maximum power requirement and the cost of purchase of additional power from traders and other sources is higher even at present as compared to the projected cost of power from this project. In the circumstances long term PPAs are a much more reliable and cost effective ! option to plan for the deficit between requirement and availability of power. In this context, this project will provide an assured supply of power that will meet the peak deficit in paddy season which is otherwise met through expensive purchases at high /UI rates. The Commission thus observes that the cost of power to be procured by PSEB from this project is quite competitive and reasonable.

    3.6.5       A perusal of the relevant clauses of the PSA including its Annexures and their harmonious interpretation reveals that the petition for regulatory approval of tariff for sale of electricity to be generated by the project has to be filed before the “Appropriate Commission” and the tariff as approved by it or the capped tariff whichever is lower would be applicable. However the starting point for the determination of such tariff will be the availability of the “completed capital cost of the project approved by the Appropriate Commission”. Further clause 10.1 of the PSA also provides that such tariff shall be based on, “financial parameters and capped rates as specified in the PPA. Financial Parameters are laid down in Schedule E of the PPA document which is Annexure C of the PSA. This clearly states that, “The tariff from the project and the overall scheme outlined in this schedule E, including the tariff capping an! d the carry over of the tariff credits is subject to the approval of the Appropriate Commission”.

    3.6.6       It has already been observed that this petition is to be examined as per Section 86 of the EA 03. In the light of this observation, there is therefore no scope for this Commission to determine tariff for sale of power by the developer to PTC. However, the PSA and its enclosures read holistically, leave no doubt that the tariff payable to the Developer by PTC has to be determined by the “Appropriate Commission”. The PSA further provides that in the event of determined tariff being more than capped tariff, the difference will be converted into tariff credits which are redeemable when determined tariff goes below the capped tariff in any particular year. The Commission observes that it is equally necessary in these circumstances to specifically stipulate that in the eventuality of determined tariff being lower than capped tariff, power will be sold by PTC to PSEB on the basis of determined tariff only. It is also neces! sary to observe that instead of an ad-hoc interest rate of 12% on tariff credits, this can more appropriately be linked to the prevailing Short Term Prime Lending Rate (PLR) of the State Bank of India for the relevant year(s).

    3.6.7       The Commission notes that the PSA caps secondary energy tariff at 75 paise/unit throughout the 40 years of operation. As per existing CERC principles, Secondary Energy Rate for hydro power plants (except for pumped storage generating stations) should be equal to the lowest variable charges of a central sector thermal power generating station of the concerned region. This rate is currently around 83 paise/unit. Considering the existing rate of secondary energy charges and their likely increase in the next 40 years, it is evident that a fixed secondary energy charge of 75 paise/unit is quite reasonable.

    3.7       Trading Margin

    3.7.1       Besides the landed cost of power for PSEB in respect of the PSA, the Commission has also examined the trading margin proposed by PTC in the PSA. The Commission has noted that Clause 10.1 of the PSA states that the trading margins shall be in compliance with any norms applicable to transactions of the nature and duration as captured in this PSA, as may be laid down by the CERC from time to time. The Commission agrees with this stipulation and observes that the sale of electricity by PTC from this Project, located in Himachal Pradesh to PSEB is “inter state trading of electricity”. As per Section 79 (1)(j) of the EA 2003, CERC shall fix the trading margin in the interstate trading of electricity if considered necessary. In light of the above, the applicable trading margin shall be as fixed by CERC from time to time. In the eventuality of CERC not fixing the trading margin for any particular period, it shall be such ma! rgin last fixed by CERC.

    3.8       Dispute Resolution Mechanism

    3.8.1 As per the PSA, all disputes or differences between the parties arising out of or in connection with the PSA shall be first settled through mutual negotiation. If that is not possible, the same shall be referred for arbitration to an expert agreed upon by both the parties. In case, the parties involved do not submit the dispute to an expert for resolution, such dispute would be submitted for arbitration in accordance with Indian Arbitration and Conciliation Act 1996.

    3.8.2       Section 86(1)(f) of the EA 03 empowers the Commission to adjudicate upon disputes between licensees, and generating companies and to refer any dispute for arbitration. Further, Section 158 of the EA 03 states as under:
    Where any matter is, by or under this Act, directed to be determined by arbitration, the matter shall, unless it is otherwise expressly provided in the licence of a licensee, be determined by such person or persons as the Appropriate Commission may nominate in that behalf on the application of either party; but in all other respects the arbitration shall be subject to the provisions of the Arbitration and Conciliation Act, 1996 (26 of 1996).
    Very evidently clause 14.3 of the PSA is not in consonance with statutory provisions and would require to be suitably amended by the petitioner bringing it in line with the provisions of the EA 03.

    3.9       Term of the PSA

    The term of the PSA is 40 years which is more than the assumed economic life of a Hydro Power Plant as per CERC (Terms and Conditions of Tariff) Regulations, 2004. The Commission is of the view that so long as the cost of power to be sourced from the project remains competitive and falls in the merit order, the interest of PSEB and the consumers is better served by extracting a longer life from the given assets.

    3.10      Consequences of Default and Termination

    The Commission has examined the consequences of default and termination as well as the compensation to be paid by PTC to PSEB in case of a PTC event of default or vice versa. The Commission observes that Clause 15.7.1 of PPA specifically mentions that in case of “Developer Event of Default”, the Developer shall not sell power to any third party till termination payment has been made. The Commission is of the view that the Petitioner needs to incorporate a similar clause in the PSA, whereby PTC will also not sell power to any third party till termination payment has been made by PTC to PSEB subsequent to a “PTC Event of Default”.

    3.11      Other Clauses

    One of the conditions precedent set out in clause 3.1 is that the Appropriate Commission will, within 12 months, approve the tariff for the sale and purchase of electricity pursuant to this agreement. It is further provided that this time limit can be extended or the requirement itself waived by mutual consent. In the absence of an agreement between the parties, either party can, by giving a 30 days notice, terminate the agreement. The Commission observes that determination of tariff by the Appropriate Commission is a very fundamental requirement of both the PPA and PSA which is eminently fair to all concerned. Thus, conditions that permit determination of tariff to be either waived or allow the agreement itself to be terminated are against the underlying principles on which the PPA and PSA are based. Moreover, it is inappropriate that an agreement between two parties seeks to impose a time limit on determination of tariff by a Regulatory Authority. In thes! e circumstances, the Commission is of the view that provisions of clauses 3.1 and 3.3.1 need to be suitably amended with a view to ensure that there are no such provisions that allow for a waiver of determination of tariff or the termination of agreement itself in the absence of it.

    4. Conclusion

    4.1       The Commission is enjoined to balance the interests of all stakeholders including the licensee and the consumers. It is, therefore, necessary to ensure that power is purchased by PSEB in an economical manner.

    4.2       The above discussion brings out that there is clearly a requirement for purchase of additional power and that such requirement is likely to continue for the entire term of the PSA. An analysis of the Merit Order in which PSEB currently purchases power and is likely to do so for next 20 years or so also indicates that the price at which power is proposed to be purchased from PTC is fair and reasonable. An additional positive feature of the PSA is that although payments to PTC may vary on account of tariff credits or mitigation of hydrological risk, such payments would never in any given year exceed the capped tariff as per the agreement. Once this capped tariff is found reasonable then no variation on account of subsequently determined tariff or hydrological risk makes any material difference.

    4.3       Accordingly in exercise of the powers vested in the Commission under the EA 03 and subject to the Petitioner complying with the directions of the Commission given in this order, the Commission hereby grants approval to the electricity purchase and procurement process of PSEB including the capped tariff at which the electricity shall be procured through the PSA between PSEB and PTC for supply of power from the 100 MW Malana-II Hydro Electric Project in District Kullu in the State of Himachal Pradesh being developed by Everest Power Private Limited.

    4.4       The Commission further holds that, as and when tariff is determined by the Appropriate Commission, such tariff or capped tariff discussed supra whichever is lower, shall be applicable. The Commission further reiterates that, any changes if required to be made at a later stage in respect of the approvals granted by the Commission in this Order, shall be subject to the prior approval of the Commission.
    (Satpal Singh Pall)(Baljit Bains)(Jai Singh Gill)

    Dated: January 24, 2007