Petition No.4 of 2007
Date of hearing 16.4.08
Date of Order : 29-04-08

M/s GVK Power (Goindwal Sahib) Ltd. (GVK) filed this petition before the Punjab State Electricity Regulatory Commission (Commission) on 28.3.2007 seeking approval of the estimated project cost and tariff structure for their 2 x 270 MW coal based generating station to be set up at Goindwal Sahib, District Tarn Taran. The petition which was admitted on 4.4.2007 was subsequently allowed to be amended and accordingly taken on record on 14.5.2007.

Regulations 20 and 37 of the Punjab State Electricity Regulatory Commission (Terms and Conditions for Determination of Tariff) Regulations, 2005 stipulate that in determining the cost of generation, the principles and methodologies specified by the Central Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations, 2004 (Regulations) are to be kept in view. Regulation 5 (3) of the latter Regulations provides that a generating company may make an application for determination of provisional tariff in advance of the anticipated date of completion of the project, based on capital expenditure actually incurred upto the date of making the application, duly audited and certified by the statutory auditors. Regulation 17 further provides that the actual expenditure incurred on completion of a project shall form the basis for determination of final tariff. The second proviso to Regulation 17 lays down that any person intending to establish, operate and maintain a generating station may make an application before the Commission for ‘in principle’ acceptance of the project capital cost and financing plan before taking up the project. The third proviso further provides that where the Commission has given ‘in principle’ acceptance to the estimates of project capital cost and financing plan, the same shall be the guiding factor for applying a prudence check on the actual capital expenditure. Evidently these provisions have been incorporated so as to reduce uncertainty regarding tariff on completion of a project which will help investors in achieving financial closure of the project.

The Commission invited public objections to the petition and held a public hearing on 22.8.07. The petitioner furnished separate replies to the objections raised by each of the objectors.

In it’s Order dated 20.11.07, the Commission observed that one of the prayers of the petitioner relates to approval of the estimated project cost and considered it as a request for ‘in principle’ acceptance of the estimated capital cost and financing plan which is covered under the provisions of Regulation 17, referred to above. A careful perusal of this Regulation makes it apparent that ‘in principle’ acceptance to the estimates of project capital cost by the Commission has to be based on upto date supporting data so that the cost determined is as close as possible to the project cost finally incurred. This is specially relevant as this cost is to be the guiding factor for applying a prudence check on the actual capital cost with the latter having a direct bearing on the tariff to be determined. With a view to obtaining information of the project as required by this Regulation, the Commission sought further inputs from the petitioner who has, accordingly, submitted additional filings.

The Commission, on the basis of the filings in the petition, additional filings submitted by the petitioner, issues raised in public hearings -- to the extent these relate to ‘in principle’ acceptance of estimates of the project capital cost & financing plan -- and replies thereto, gives the following findings:

TECHNICAL

There are some technical concerns regarding the size of Generating Units, calorific value of coal and norms of operation as per CERC (Terms and Conditions of Tariff) Regulations 2004. Issues such as the calorific value of coal and CERC norms of operation have not been touched upon in this Order, as in the present petition, only ‘in principle’ acceptance to the estimates of project capital cost and financing plan are being considered. The Commission notes that the Unit size is 270 MW instead of the standard Unit of 250 MW. The petitioner has clarified that 270 MW is not non standard and is an upgraded version of BHEL’s 250 MW Unit. In their latest filings, the petitioner has informed that the steam turbine belongs to the 250 MW class of which more than 15 Units are in commercial operation and another 22 Units under execution. Similar Unit ratings are also being supplied by BHEL to Sikka TPP, Gujarat and that this is the best techno-commercially suitable Unit size available in the market at this juncture. Moreover, the petitioner claims that selection of 270 MW Unit size will not increase the project cost but, rather make it more economical. By way of a clarification, BHEL has informed GVK that the modules used for 270 MW sets are the same as for 250 MW, and only the turbine internals have been modified to accommodate a higher amount of steam for increased power output. It is understood that BHEL will also redesign the boiler in order to enhance its capacity and provide sufficient cushion in the turbine design to enable increased generation through modification in the flow path.

STATUTORY AND NON STATUTORY CLEARANCES

The petitioner has stated that all the required clearances have been obtained. It was clarified that the Punjab Pollution Control Board (PPCB) and Ministry of Environment & Forests (MoEF) had approved the project in the year 1999 and the petitioner has again approached both these bodies for obtaining fresh clearances. A public hearing has reportedly been conducted by PPCB on 7.9.2007 and the proceedings have been sent to MoEF for final approval.

The Commission observes that most of statutory and non statutory clearances granted to the petitioner are subject to conditions stipulated therein. Further, the Water supply agreement with the State Irrigation Department of March 29, 2001 is for supply of water to a 2x250 MW project and the same is valid for 20 years from the date of COD of the project. Evidently, the same may need revision for the enhanced capacity and life of the Plant. Similarly the NOC obtained from the Western Command was issued on 31.8.1998 and may also need revalidation. In the circumstances, the ‘in principle’ approval being considered hereunder is subject to the availability of unencumbered statutory and non statutory clearances.

FUEL SUPPLY AGREEMENT

GVK has informed that the Ministry of Coal, Govt. of India (MoC) has allotted the Tokisud North Sub block in the State of Jharkhand as a captive mine for this project. The block was originally allotted in 2002 for the project at Goindwal Sahib, then in Amritsar District. A copy of letter dated 22.10.2007 from the MoC, wherein location of the plant has been confirmed to be now in Tarn Taran District has also been submitted. The petitioner while reporting the formation of a SPV (M/s GVK Coal (Tokisud) Company Pvt. Ltd.) to carry out the mining operations has also intimated that :-

1. A geological report for the allotted Tokisud Coal Mine has been obtained from CMPDIL and the mine plan prepared and submitted to the MoC in Aug. 2005 which has approved the same in April, 2006. The plan envisages extraction of about 52.5 million tonnes of coal at an average rate of 2.0 million tonnes per annum.
2. The mining lease application has been processed by the Hazaribagh District Administration and is under review by Secretary (Mine & Geology), Govt. of Jharkhand.
3. The Jharkhand Pollution Board has conducted public hearings for the Environment Impact Assessment (EIA) on 12.11.2007. The final EIA report is at an advanced stage of completion for submission to the Ministry of Environment and Forests.
4. Land acquisition for compensatory afforestation is nearing completion.
5. The coal mine is likely to start production by 2010 matching with the commissioning of this project.
6. Ministry of Coal has on 9.1.2008 allotted a part of the Seregarha Coal Mine with a reserve of 66.67 million tonnes approximately to augment coal supply for Goindwal Sahib Project. The coal block will be jointly developed by M/s GVK and M/s Arcellor Mittal.

GVK has submitted that work on the railway siding will be carried out by Indian Railways or their approved contractor M/s BARSYL, Secunderabad. The take off station for the project is Khadoor Sahib which would need conversion from halt Station to Block Station and a 3.5 Kms. line from this station to the project site will be required for which survey work has been completed.

Coal Transportation

The petitioner has intimated that the draft Coal Transport Agreement has been submitted to the Railway Board, New Delhi, where it is under consideration.

EVACUATION OF POWER

The petitioner has reported that the sole beneficiary of the project will be PSEB who have filed the requisite petition for approval of the Amended & Restated Power Purchase Agreement initialed between the parties.

PROJECT CAPITAL COST
Land

The petitioner has informed that the Govt. of Punjab has initiated the process of acquiring a total of 1093 acres of land for the project, out of which about 54 acres of land was purchased/acquired in the year 1999 at a cost of Rs. 2.60 crores. The Commission notes that GVK while seeking the clearance of MoEF had indicated the requirement of land as 715 acres. The petitioner has clarified that 1093 acres of land is proposed to be acquired to accommodate a third generating unit, the work for which will be initiated as soon as the construction work on the instant project commences. The Commission is of the view that the cost of land for the third unit can not be presently capitalized and thus a land requirement of 715 acres is sufficient for a 2x270 MW Generating Station. As regards the estimated cost of the land, the petitioner had initially provided 75.61 crores but in the subsequent filings, the estimated cost for land has been revised to Rs.160 crores. Thereafter, GVK intimated that the Government of Punjab has completed the land acquisition process for the project and the award is likely to be announced at the rate of Rs.16.15 lakhs per acre. Accordingly, the balance requirement of 661 acres (715-54) @ Rs.16.15 lakhs per acre comes to Rs.106.75 crores. The Commission, accordingly, approves an amount of Rs.109.35 crores (106.75+2.60) for the land requirement of 715 acres for the project.

Boiler, Turbine and Generator (BTG) Package

As per the initial provision, the BTG package was for Rs.857.50 crores excluding taxes and duties. GVK, after inviting competitive bids, has issued a Letter of Intent (LOI) to M/s BHEL for supply of BTG package at a cost of Rs.1070.58 crores inclusive of taxes and duties which the Commission considers as reasonable for the purpose of estimating project capital cost.

Balance of Plant (BoP)

In the original petition, GVK has provided a sum of Rs.444.87crores for this purpose excluding taxes & duties and engineering, erection & civil works. Separate provisions of Rs.245.52 crores and Rs.624.13 crores respectively, has been made for the above exclusions. The petitioner has since invited competitive bids for the BOP and obtained the lowest bid of Rs.1003 crores inclusive of taxes and duties, engineering, erection and civil works. GVK has now informed that the contract for BOP has been finalized and furnished a copy of LOI which indicates a contract price of Rs.1005 crores including all taxes and duties (excluding entry tax and octroi) as on 1.4.08. Any variation in cement and steel prices will, however, be taken into account up to the estimated quantities mentioned in the LOI. The Commission notes that GVK has chosen to place the LOI on the highest bidder and that the price is inclusive of the provision for two ‘natural draft cooling towers’. However, it has been intimated that the BOP contract price will be reduced by Rs.50 crores in the event of ‘induced draft cooling towers’ being accepted. The Commission notes that the quantum of work varies in the bids received and that work allotted is on a negotiated basis. For that reason, the Commission accepts the negotiated price of Rs. 1005 crores for the BOP package subject to the condition that it will be reduced by Rs.50 crores if GVK eventually goes in for ‘ induced draft cooling towers’.

Non EPC Works

In the petition, GVK has provided Rs.86 crores for non EPC works i.e. works other than BTG & BOP. In the subsequent filings, it has been informed that the provision for non EPC works includes Rs.35 crores for railway siding as intimated by the approved railway contractor M/s BARSYL. GVK has indicated that the railway siding work will be carried out either by Indian Railways or their approved contractor M/s BARSYL, Secunderabad. This entails upgradation of the Khadoor Sahib Railway Station and the laying of a 3.5 Km line from this station to the project site. The remaining provision of Rs.51 crores (86-35) is stated to be for the residential colony, boundary wall, administrative building, green belt, site office, approach road, site grading, site drainage, fire station building, main entrance gate complex, security barracks and ash pond etc. The Commission is inclined to allow the amount of Rs.86 crores for non EPC works but does not approve an additional amount of Rs. 49 crores for site clearing/grading and Ash pond reported separately in the latest filing by the petitioner as the same are considered included in the total non EPC cost of Rs. 86 crores intimated earlier.

Start up expenses

The petitioner has provided Rs.15 crores towards start up expenses. The Commission does not allow this cost in view of the normal industry practice of setting off such expenses against revenue from sale of infirm power and not to add these to the project capital cost.

Power and Water for Construction

The petitioner envisages an outlay of Rs.12 crores for the purpose. The Commission notes that this cost is included in the BTG as well as BOP contracts while the cost associated with providing power and water at the construction site is included in the estimate for non EPC works. As such no provision is required to be separately made for this purpose.

Rehabilitation & Resettlement Cost and Preliminary Expenses

The petitioner had indicated a requirement of Rs.5 crores on this account. In one of its filings, GVK has mentioned that this amount is necessary for relocation of existing power lines in the plant area, construction of approach roads to lands of farmers, access to which is blocked by land acquisition for the project and drainage around the plant to protect land not acquired for this project. The Commission considers the provision of Rs. 5 crores to be reasonable, as also the amount of Rs.0.25 crores provided for preliminary expenses.

Consultancy & Engineering and Operator Training

The provision of Rs.7.50 crores for consultancy and engineering and Rs.5 crores for operator training is considered reasonable by the Commission.

Pre-operative Expenses

A sum of Rs 50 crores has been provided by the petitioner on this account. The Commission notes that the bulk of the work relating to this project will be through two major contracts for the BTG and BOP packages which include erection, testing and commissioning. Moreover, railway siding work is to be carried out on an estimated contract price of Rs.35 crores with the remaining non EPC works of Rs.51 crores roughly amounting to 2% of the total project cost.

As such, the establishment that the petitioner will need to deploy during the project period for supervision and management is not likely to be very large. The cost estimate provided in this regard thus appears to be very much on the higher side and the Commission considers that a sum of Rs.15 crores, is sufficient to meet these costs.

Insurance

An amount of Rs 11.44 crores is provided towards insurance in the project capital cost. Usually, insurance charges are included in the contract between the contractor and the project developer. In the present case also, it is noticed that the petitioner has indicated that the BTG and BOP contractors will take erection all-risk policies. GVK in its latest filing has clarified that the premium provided in the estimated project cost pertains to Advance Loss of Profits Policy/Delayed Startup Policy for a period of 3 years which covers loss of fixed charges attributable to physical damage during construction/transportation of equipment. The Commission is inclined to permit the additional capital cost of Rs.11.44 crores on account of insurance as GVK informed that financial institutions insist on obtaining this level of comfort.

Interest during Construction

The petitioner’s first submission indicated two types of loans – a rupee term loan and a foreign currency loan, each equal to 40% of the project cost, and carrying an annual interest rate of 10% and 7.75% respectively. Based on these, the petitioner worked out IDC as Rs 365.19 crores.

In a subsequent submission, the petitioner has indicated that, in view of contracts for the bulk of the project being mainly in Indian Rupees, the RBI is not likely to permit a foreign currency loan. In the meanwhile, interest rate on rupee term loan has increased and the petitioner has negotiated an interest rate of 11.25% on the rupee term loan. However, still assuming that 50% loan would be in foreign currency, a revised IDC of Rs 393.44 crores has been worked out by GVK on the basis of quarterwise drawl schedule/phasing of expenditure, for a period of 36 months, assuming that equity shall be expended in the debt equity ratio (80:20) from the start of the project.

The Commission has accepted the estimates of the project capital cost of Rs.2315.12 crores excluding IDC, financing charges and contingency. Since the likelihood of foreign currency loan appears remote in view of the restrictions placed by RBI on external commercial borrowing, the Commission has assumed the entire loan to be rupee term loan at a rate of 11.25% in the calculations for IDC. In the LOI, it has been mentioned that BHEL guarantees to achieve commercial operation of the first unit not later than 33 months and the second unit not later than 36 months, from the date of the notice to proceed, which has been taken in to consideration by the Commission in the IDC calculations besides the following standard terms in respect of such loans as detailed hereinafter:

1. 50% of the total equity shall be expended before any instalment of the loan can be drawn upon;
2. loan instalments can be drawn until the actual expenditure achieves the debt equity ratio (80:20) for the project; and
3. thereafter, disbursement of loan is pro rata so as to maintain the debt equity ratio as 80:20.
4. the phasing of expenditure has been assumed as 15% for the first year, 50% for the second year, 30% for third year upto COD and 5% for three months after COD of the last unit.
5. within the above phasing, the ratio of expenditure between unit 1 and unit 2 has been taken as 60:40.
6. in the IDC calculations, 36 months have been taken as the time for achieving the commercial operation of the first unit and 39 for the second one.

On the above assumptions, IDC cost works out to Rs.286.36 crores which is accepted by the Commission.

Financing Charges

The petitioner has provided Rs. 70 crores on this account including an up front fee of 0.5% of the debt committed plus taxes, a financial advisory fee of 1% of the debt amount plus taxes, a syndication fee of 0.2% of the debt availed plus taxes and a commission of Rs.31.80 crores, which is 1.06 % of the project capital cost, payable to the bankers for opening letters of credit.

The Commission is not inclined to allow the sum of Rs.31.80 crores as such amounts are negotiable and not always insisted upon by the lending institutions. The Commission is also of the view that the estimated amount on account of financial advisory services is not commensurate with the quantum of services provided most of which the project developers usually manage in-house. However, the up front fee of 0.5% and the syndication fee of 0.2% of the loan amount both inclusive of taxes appear to be reasonable. Accordingly, the Commission approves Financing Charges of Rs.16 crores.

Contingency

GVK has provided a sum of Rs 66.85 crores for unforeseen expenses. As a bulk of the expected outlay has been firmed up in terms of a contract for the BTG, BOP package and the Railway Siding, there is a need to provide contingency only for remaining non EPC works estimated to cost Rs.51 crores. Accordingly, the Commission considers that the provision of Rs 5 crores, is sufficient and reasonable for this purpose.

Working Capital Margin

An amount of Rs 46 crores has been provided towards working capital margin. The Commission notes that in similar petitions of M/s Essar Power Ltd., Nagarjuna Power Corporation Ltd. and Torrent Power Generation Ltd., CERC has held that working capital margin is not to be considered as part of the project capital cost. Accordingly, the Commission concludes that this amount should not form part of the project capital cost.

FINANCING PLAN

A debt equity ratio of 80:20 has been intimated by the petitioner whereas CERC norms provide 70:30 for the purpose of determination of tariff provided that where deployment of equity is less than 30%, the actual debt and equity shall be taken into account. The petitioner has also submitted a letter from IDBI bank bringing out the award of mandate in favour of the bank for syndicating the debt requirement of the project. The Commission finds the same sufficient for according ‘in principle’ acceptance of the financing plan.

CONCLUSION

Based on the above, item-wise estimates of project capital cost as submitted by M/s GVK and approved by the Commission are depicted in tabulated form in the Annexure. The Commission notes that with the issuance of LOI for BTG and BOP packages, nearly 79% of the estimated project capital cost gets firmed up. Another 15% of the capital cost is accounted for by land cost (4%) and IDC (11%) thereby firming up nearly 94% of the total cost of the project. Another sum of Rs.35 crores for the railway siding can also be considered as firm. The balance infirm amount comes to Rs.116.19 crores (approx. 4.4%) which includes Rs.51 crores for non EPC cost (excluding railway siding). On the above basis, the Commission accords ‘in principle’ acceptance to the estimated project capital cost of Rs.2622.48 crores. This approval will, however, not be construed as approval/ratification of any other aspect separately covered under an applicable law.

Sd/-	Sd/-	Sd/-
Satpal Singh Pall	Baljit Bains	Jai Singh Gill
Member	Member	Chairman

Place: Chandigarh
Date: 29-04-2008

Annexure