Power Grid Corporation Of India Ltd. v. Karnataka Power Transmission Corporation Ltd.

In this petition, the petitioner, Power Grid Corporation of India Ltd. has sought approval for tariff for 400 kV D/C Kaiga-Sirsi Transmission Line along with associated bays in Southern Region for the period from 1.4.2001 to 31.3.2004 based on terms and conditions of tariff contained in the Commission's notification dated 26.3.2001, (hereinafter referred to as “the notification dated 26.3.2001”).

2. The implementation of Kaiga Transmission System for evacuation of central sector power from Kaiga Atomic Power Project, Stage-I was approved along with Kaiga Atomic Power Project in 1994, at an estimated cost of Rs. 29.03 crore, including IDC of Rs. 3.32 crore at 1st Quarter 1993 price level. The implementation of the transmission system was entrusted to the petitioner. Thereafter, the Board of Directors of the petitioner company in its meeting held on 23.12.1998 accorded its fresh approval, under the powers delegated by the Bureau of public enterprises, for capital outlay of Rs. 53.65 crore, including IDC of Rs. 11.09 crore, for Kaiga Transmission System. The approval for the revised cost estimate (completed cost) of Rs. 57.53 crore has been accorded by the Board of Directors of the petitioner company in its 131st meeting held on 13.6.2002

3. 400 kV D/C Kaiga-Sirsi Transmission Line along with associated bays was declared under commercial operation with effect from 1.12.1999 The tariff for the period up to 31.3.2001 was decided by the Commission vide its order dated 17.6.2003 in Petition No. 19/2000 and the admitted cost of 400 kV D/C Kaiga-Sirsi Transmission Line along with associated bays as per the said order dated 17.6.2003 is Rs. 5668.66 lakh. The petitioner in the present petition has sought approval for transmission charges for the period from 1.4.2001 to 31.3.2004 as under:

(Rs. in lakh)

Transmission Tariff 2001–2002 2002–2003 2003–2004 Interest on Loan 205.08 64.11 60.30 Interest on Working Capital 26.25 22.00 22.72 Depreciation 151.19 152.27 153.28 Advance against Depreciation 114.06 0.00 0.00 Return on Equity 400.42 407.15 413.43 O&M Expenses 69.73 73.40 78.29 Total 966.73 718.93 728.02

4. In addition, the petitioner has prayed for approval of other charges like Foreign Exchange Rate Variation, Income Tax, incentive, Development Surcharge, late payment surcharge, other statutory taxes, levies, cess, filing fee, etc. in terms of the notification dated 26.3.2001

CAPITAL COST

5. As laid down in the notification dated 26.3.2001, the project cost, which includes capitalised initial spares for the first 5 years of operation, as approved by CEA or an appropriate independent agency, other than Board of Directors of the generating company, as the case may be, shall be the basis for computation of tariff. The notification dated 26.3.2001 further provides that the actual capital expenditure incurred on completion of the project shall be the criterion for the fixation of tariff. Where the actual expenditure exceeds the approved project cost the excesses as approved by the CEA or an appropriate independent agency, as the case may be, shall be deemed to be the actual capital expenditure for the purpose of determining the tariff, provided that excess expenditure is not attributable to the ‘Transmission Utility’ or its suppliers or contractors and provided further that where a transmission services agreement entered into between the Transmission Utility and the beneficiary provides a ceiling on capital expenditure, the capital expenditure shall not exceed such ceiling.

6. As already noticed, the tariff for Kaiga-Sirsi transmission line was notified by the Commission vide its order dated 17.6.2003 by considering cost of Rs. 5668.66 lakh. Therefore, for the purpose of present petition, the capital cost as considered by the Commission in its earlier order, shall be the base for determination of tariff in the present petition.

ADDITIONAL CAPITALISATION

7. The notification dated 26.3.2001 provides that tariff revisions during the tariff period on account of capital expenditure within the approved project cost incurred during the tariff period may be entertained by the Commission only if such expenditure exceeds 20% of the approved cost. In all cases, where such expenditure is less than 20%, tariff revision shall be considered in the next tariff period.

8. The petitioner has claimed the additional capital expenditure for the period after 01.04.2001 in the petition as under

(Rs. In lakh)

Expenditure from 1.4.2001 to 31.3.2002 5.60 Additional anticipated expenditure from 1.4.2002 to 31.3.2004 78.47 Total additional expenditure 84.07 Approved cost 5356.00 %age of additional expenditure to the approved cost 1.57%

9. As the additional expenditure is less than 20%, its capitalisation has not been allowed.

EXTRA RUPEE LIABILITY

10. The notification dated 26.3.2001 provides that

(a) Extra rupee liability towards interest payment and loan repayment actually incurred, in the relevant year shall be admissible; provided it directly arises out of foreign exchange rate variation and is not attributable to Utility or its suppliers or contractors. Every utility shall follow the method as per the Accounting Standard-11 (Eleven) as issued by the Institute of Chartered Accountants of India to calculate the impact of exchange rate variation on loan repayment.

(b) Any foreign exchange rate variation to the extent of the dividend paid out on the permissible equity contributed in foreign currency, subject to the ceiling of permissible return shall be admissible. This as and when paid, may be spread over the twelve-month period in arrears.

11. The petitioner has claimed FERV with the following method:

Outstanding loan as on 31.3.2001 (in foreign currency) × (exchange rate as on 31.3.2001 - exchange rate as on the date of commercial operation/1.4.92)

12. The amount of FERV arrived at in the above manner is added to the capital cost as on 1.4.2001 (base capital cost for the tariff period).

13. We have considered the matter. On consideration of the fact that the method up to 31.03.2001 to allow the FERV was on repayment of loan and payment of interest on actual basis, we have decided that FERV to be capitalised for adding in the Gross Block as on 01.04.2001 would be arrived in the following manner:

Foreign Loan outstanding as on 31.03.2001 × (Exchange Rate as on 31.03.2001 - Exchange Rate as on date of commercial operation as given in the petition).

14. FERV amount has been calculated in accordance with the above methodology, as per details given as under:

BOI (Foreign Currency) Outstanding balance as on 31.03.2001 (USD in lakh) 4.46 Exchange Rate as on 31.03.2001 (Rs./USD) 46.88 Exchange Rate as on the date of commercial operation 43.70 FERV on the outstanding loan as on 31.03.2001 (Rs. in lakh) 14.18

15. FERV of Rs. 14.18 lakh has been added to the capital cost and considered for the purpose of tariff fixation. The capital expenditure considered in the calculations for tariff is under:

(Rs. in lakh)

Capital Expenditure up to 31.3.2001 5668.66 FERV up to 31.3.2001 14.18 Capital Expenditure up to 31.3.2001 5682.84 Additional Capital Expenditure after 31.3.2001 0.00 Capital Expenditure considered for tariff fixation 5682.84

16. The approval of FERV is subject to the condition that the petitioner shall furnish a certificate within four weeks of this order that there has been no drawl of the foreign loan after date of commercial operation of the transmission elements claimed in the petition. If petitioner fails to submit the certificate within stipulated time, no amount on account of FERV would be allowed as pass through in tariff of concerned line.

SOURCES OF FINANCING. DEBT - EQUITY RATIO

17. As per Para 4.3 of the notification dated 26.3.2001, capital expenditure of the transmission system shall be financed as per approved financial package set out in the techno-economic clearance of CEA or as approved by an appropriate independent agency, as the case may be. The petitioner has claimed tariff by taking debt and equity in the same ratio as was considered by the Commission in its order dated 17.6.2003, that is, in the ratio of 56:44. It is pointed out on behalf of the respondents that taking debt and equity as claimed by the petitioner will result into higher return on equity (ROE). FERV amount has, however, been added to the loan and equity as on 01.04.2001 in the ratio of 50:50.

18. The respondents have submitted that equity of 20% should be considered for the purpose of fixation of tariff.

19. In the present case, the assets were commissioned before 01.4.2001 and the Commission while notifying tariff vide order dated 17.6.2003 had considered debt and equity on actual basis in the ratio of 56:44. Therefore, the debt-equity ratio of 56:44 as considered by the Commission earlier has been considered for determination of tariff in the present petition. The additional capitalisation on account of FERV has also been divided between debt and equity in the ratio of 56:44. The relevant details of debt and equity considered for the purpose of fixation of tariff are given hereunder:

(Rs. in lakh)

Original Addition on account of FERV Total Loan 3176.00 7.95 3183.95 Equity 2492.66 6.24 2498.90 Total 5668.66 14.18 5682.85

INTEREST ON LOAN

20. As provided in the notification dated 26.3.2001, interest on loan capital is to be computed on the outstanding loans, duly taking into account the schedule of repayment, as per financial package approved by CEA or any independent agency.

21. The petitioner has claimed interest on the basis of net outstanding loan as was admitted by the Commission in the order dated 17.6.2003 for previous tariff setting. However, the interest on foreign loan has been worked out by the petitioner in foreign currency and the same has been multiplied with exchange rate as on 31.03.2001 This would amount to working out the interest on foreign loan on revalued foreign loan at the exchange rate as on 31.03.2001, which results in double claim. Interest on notional loan has been claimed on the basis of (i) division of FERV into notional loan & equity in the ratio of 50:50(ii) depreciation on FERV as repayment during the year (iii) weighted average rate of interest of total outstanding loan as on 01.04.2001

22. In keeping with the provisions of the notification dated 26.3.2001, the following methodology has been adopted for calculation of interest on loan:

(i) Gross amount of loan, repayment of loan up to 31.03.2001 and net outstanding loan as on 31.03.2001 as considered by the Commission in its order dated 17.6.2003 for determination of annual transmission charges for the period up to 31.03.2001 has been considered.

(ii) The repayment for the year 2001–2002 to 2003–2004 and rate of interest etc. of the above loan has been worked out from the loan details submitted by the petitioner in the affidavits filed before the Commission.

(iii) Notional loan arising out of FERV has been divided between debt and equity in the ratio 56:44.

(iv) The repayment for the year 2001–2002 to 2003–2004 of the above notional loan has been worked out as per the following formula:

Notional net loan at the beginning of the year × (actual repayment of the respective foreign loan/actual net respective foreign loan at the beginning of the year

(v) Rate of interest etc. of the notional loan on account of FERV has been taken of the respective foreign loan from the loan details submitted by the petitioner in the affidavits filed before the Commission.

(vi) The interest on loan has been worked out considering the repayment schedule as per the details filed by the petitioner on affidavit, though the petitioner has worked out interest on loan for full month even though repayments fall on a date during the month.

23. The relevant details in support of calculation of interest on loan are given hereunder:

CALCULATIONS OF INTEREST ON LOAN

(Rs. in lakh)

Details of Loan 2001–2002 2002–2003 2003–2004 No. of days in the Year 365 365 366 Bonds VI Gross Loan-Opening 161.00 161.00 161.00 Cumulative Repayment up to Previous Year 0.00 0.00 16.10 Net Loan-Opening 161.00 161.00 144.90 Repayment during the year 0.00 16.10 16.10 Net Loan-Closing 161.00 144.90 128.80 Rate of Interest 13.13% 13.13% 13.13% Interest 21.14 20.47 18.35 Repayment Schedule 10 Annual Instalments starting from 06.12.2002 SBI-I/Bond XI (Option-II) (Refinancing of SBI-I from Bond XI-Option-II on 7.12.2001) Gross Loan-Opening 321.00 321.00 321.00 Cumulative Repayment up to Previous Year 0.00 0.00 0.00 Net Loan-Opening 321.00 321.00 321.00 Repayment during the year 0.00 0.00 53.50 Net Loan-Closing 321.00 321.00 267.50 Rate of Interest - SBI-I 12.00% Rate of Interest - Bond XI-Option-II 9.20% 9.20% 9.20% Interest 35.69 29.53 27.49 Repayment Schedule SBI-I-7 Annual Instalments staring from 24.03.2003 (refinanced on 07.12.2001)/Bond XI-Option-II (6 Annual Instalments staring from November, 2003) Bonds III (I) Issue I Gross Loan-Opening 85.34 85.34 85.34 Cumulative Repayment up to Previous Year 0.00 85.34 85.34 Net Loan-Opening 85.34 0.00 0.00 Repayment during the year 85.34 0.00 0.00 Net Loan-Closing 0.00 0.00 0.00 Rate of Interest 13.50% 13.50% 13.50% Interest 10.51 0.00 0.00 Repayment Schedule Bullet on 28.02.2002 Bonds III (I) Issue II Gross Loan-Opening 13.66 13.66 13.66 Cumulative Repayment up to Previous Year 0.00 13.66 13.66 Net Loan-Opening 13.66 0.00 0.00 Repayment during the year 13.66 0.00 0.00 Net Loan-Closing 0.00 0.00 0.00 Rate of Interest 9.75% 9.75% 9.75% Interest 0.77 0.00 0.00 Repayment Schedule Bullet on 28.10.2001 Bond III (II SERIES) Gross Loan-Opening 580.00 580.00 580.00 Cumulative Repayment up to Previous Year 580.00 580.00 580.00 Net Loan-Opening 0.00 0.00 0.00 Repayment during the year 0.00 0.00 0.00 Net Loan-Closing 0.00 0.00 0.00 Rate of Interest 16.30% 16.30% 16.30% Interest 0.00 0.00 0.00 Repayment Schedule Bullet on 01.09.2000 Bond IV (II TRENCH) Gross Loan-Opening 620.00 620.00 620.00 Cumulative Repayment up to Previous Year 620.00 620.00 620.00 Net Loan-Opening 0.00 0.00 0.00 Repayment during the year 0.00 0.00 0.00 Net Loan-Closing 0.00 0.00 0.00 Rate of Interest 17.07% 17.07% 17.07% Interest 0.00 0.00 0.00 Repayment Schedule Bullet on 08.01.2001 Bond IV (II TRENCH) Gross Loan-Opening 610.00 610.00 610.00 Cumulative Repayment up to Previous Year 0.00 610.00 610.00 Net Loan-Opening 610.00 0.00 0.00 Repayment during the year 610.00 0.00 0.00 Net Loan-Closing 0.00 0.00 0.00 Rate of Interest 17.84% 17.84% 17.84% Interest 31.60 0.00 0.00 Repayment Schedule Bullet on 16.07.2001 Bond V Gross Loan-Opening 590.00 590.00 590.00 Cumulative Repayment up to Previous Year 0.00 590.00 590.00 Net Loan-Opening 590.00 0.00 0.00 Repayment during the year 590.00 0.00 0.00 Net Loan-Closing 0.00 0.00 0.00 Rate of Interest - SBI-I 15.80% 15.80% 15.80% Interest 84.03 0.00 0.00 Repayment Schedule Bullet on 24.02.2002 BOI (Foreign Currency) Gross Loan-Opening 195.00 195.00 195.00 Cumulative Repayment up to Previous Year 0.00 0.00 0.00 Net Loan-Opening 195.00 195.00 195.00 Repayment during the year-10th June 0.00 0.00 0.00 195.00 195.00 195.00 Repayment during the year-10th December 0.00 0.00 0.00 Net Loan-Closing 195.00 195.00 195.00 Rate of Interest 6.31% 6.31% 6.31% Interest 12.30 12.30 12.30 Repayment Schedule Equal Half yearly from 10.06.2004 Notional Loan-BOI (Foreign Currency Loan) Gross Loan-Opening 7.95 7.95 7.95 Cumulative Repayment up to Previous Year 0.00 0.00 0.00 Net Loan-Opening 7.95 7.95 7.95 Repayment during the year-10th June 0.00 0.00 0.00 7.95 7.95 7.95 Repayment during the year-10th December 0.00 0.00 0.00 Net Loan-Closing 7.95 7.95 7.95 Rate of Interest 6.31% 6.31% 6.31% Interest 0.50 0.50 0.50 Repayment Schedule Considered same as of BOI (Foreign Currency) loan i.e Equal Half yearly from 10.06.2004 Total Loan Gross Loan-Opening 3183.95 3183.95 3183.95 Cumulative Repayment up to Previous Year 1200.00 2499.00 2515.10 Net Loan-Opening 1983.95 684.95 668.85 Repayment during the year 1299.00 16.10 69.60 Net Loan-Closing 684.95 668.85 599.25 Interest 196.54 62.81 58.64

24. Bank of India (Foreign Currency) loan carries a floating rate of interest. The interest rate stated to be prevailing on 1.4.2001 has been taken in calculation. Any change/re-setting of the interest rate during the tariff period may be settled mutually by the parties. In case they are unable to do so, either party may approach the Commission.

DEPRECIATION

25. Based on the notification dated 26.3.2001, the petitioner is entitled to claim depreciation. The salient provisions for calculation of depreciation as per the notification dated 26.3.2001 are reproduced below:

(i) The value base for the purpose of depreciation shall be the historical cost of the asset.

(ii) Depreciation shall be calculated annually as per straight-line method at the rate of depreciation as prescribed in the Schedule attached to the notification dated 26.3.2001

Provided that the total depreciation during the life of the project shall not exceed 90% of the approved Original Cost. The approved original cost shall include additional capitalisation on account of foreign exchange rate variation also.

(iii) On repayment of entire loan, the remaining depreciable value shall be spread over the balance useful life of the asset.

(iv) Depreciation shall be chargeable from the first year of operation. In case of operation of the asset for part of the year, depreciation shall be charged on pro-rata basis.

(v) Depreciation against assets relating to environmental protection shall be allowed on case-to-case basis at the time of fixation of tariff subject to the condition that the environmental standards as prescribed have been complied with during the previous tariff period.

26. The petitioner has claimed the depreciation on the capital expenditure in accordance with above principles.

27. In the calculation, the depreciation has been worked out on the capital expenditure of Rs. 5682.84 lakh arrived at as per Para 15 above and the rates as prescribed in the notification dated 26.03.2001 For working out cumulative depreciation, the depreciation as per last tariff setting has been considered. The petitioner shall be entitled to depreciation of Rs. 151.12 lakh each year during 2001–2002, 2002–2003 and 2003–2004. The necessary details in support of calculation of weighted average rate of depreciation are extracted below:

Commission's Order dated 17.06.2003 in Petition No. 19/2000 FERV on the outstanding foreign loan as on 31.03.2001 Total Cost including FERV Approved capital cost Rate of Depreciation Depreciation Capital Expenditures as on 31.03.2001 Land 0.00 0.00 0.00 0% 0.00 Building & Other Civil Works 0.00 0.00 0.00 1.80% 0.00 Sub-Station Equipment 0.00 0.00 0.00 3.60% 0.00 Transmission Line 5521.22 13.81 5535.03 2.57% 142.25 PLCC 147.44 0.37 147.81 6.00% 8.87 Total 5668.66 14.18 5682.84 5356.00 151.12 14.18 5682.84 Capitalised Initial spares included above 0.00 Cumulative Depreciation up to 31.3.2001 412.06 Weighted Average Rate of Depreciation 2.66%

ADVANCE AGAINST DEPRECIATION

28. In addition to allowable depreciation, the petitioner becomes entitled to Advance Against Depreciation when originally scheduled loan repayment exceeds the depreciation allowable as per schedule to the notification dated 26.3.2001 Advance Against Depreciation is computed in accordance with the following formula:

AAD = Originally scheduled loan repayment amount subject to a ceiling of 1/12th of original loan amount minus depreciation as per schedule.

29. The petitioner has claimed advance against depreciation on the basis of

(i) 1/12th of gross loan worked out from 50% of the gross block as was admitted in the Ministry of Power tariff notification dated 20.7.1998 along with capitalisation of FERV claimed,

(ii) repayment of actual loans (excluding notional loan arising out of FERV claimed as per para 2 above) during the year, and

(iii) depreciation as claimed in the petition.

30. For working out Advance against depreciation, 1/12th of the notional loan has been considered while repayment of loan as worked out at para 23 above has been taken as repayment of the loan during the year. The petitioner is entitled to Advance Against Depreciation as calculated below:

Advance against Depreciation 2001–2002 2002–2003 2003–2004 1/12th of Gross Loan(s) 265.33 265.33 265.33 Scheduled Repayment of the Loan(s) 1299.00 16.10 69.60 Minimum of the above 265.33 16.10 69.60 Depreciation during the year 151.12 151.12 151.12 Advance against Depreciation 114.21 0.00 0.00

OPERATION & MAINTENANCE EXPENSES

31. In accordance with the notification dated 26.3.2001, Operation and Maintenance expenses, including expenses on insurance, if any, are to be calculated as under:

i) Where O&M expenses, excluding abnormal O&M expenses, if any, on sub-station (OMS) and line (OML) are separately available for each region, these shall be normalised by dividing them by number of bays and line length respectively. Where data as aforesaid is not available, O&M expenses in the region are to be apportioned to the sub-station and lines on the basis of 30:70 ratio and these are to be normalised as below:

O&M expenses per Unit of the line length in Kms (OMLL) = Expenses for lines (OML)/Average line length in Kms (LL)

O&M expenses for sub-stations (OMBN) = O&M expenses for substations (OMB)/Average number of bays (BN)]

ii) The five years average of the normalised O&M expenses for lines and for bays for the period 1995–1996 to 1999–2000 is to be escalated at 10% per annum for two years (1998–1999 and 1999–2000) to arrive at normative O&M expenses per unit of line length and per bay for 1999–2000.

iii) The normative O&M per unit length and normative O&M per bay for the year 1999–2000 for the region derived in the preceding paragraph is to be escalated @ 6% per annum to obtain normative values of O&M expenses per unit per line length and per bay in the relevant year.

These normative values are to be multiplied by line length and number of bays (as the case may be) in a given system in that year to compute permissible O&M expenses for the system.

iv) The escalation factor of 6% per annum is to be used to revise normative base figure of O&M expenses. Any deviation of the escalation factor computed from the actual inflation data that lies within 20% of the notified escalation factor of 6% shall be absorbed by utilities/beneficiaries.

32. The different elements of Operation & Maintenance expenses have been considered in the succeeding paragraphs in the light of provisions of the notification dated 26.3.2001 based on the data available since 1995–1996.

Employee Cost

33. The petitioner has, inter alia, claimed incentive and ex gratia as a part of employee cost. The petitioner was asked to specify the amount of minimum statutory bonus paid to its employees under the Payment of Bonus Act. The petitioner vide its affidavit dated 6.2.2003 has stated that the incentive paid to employees does not include minimum statutory bonus. The petitioner has further stated that the ex gratia was being paid in lieu of bonus, as is customary and a normal practice followed in private and public sectors. The petitioner has also furnished a write-up on Incentive scheme in support of the claim. It has been clarified on behalf of the petitioner that even the top management of the petitioner company is paid incentive and ex gratia included as a part of employee cost in O&M expenses claimed. The payment of incentive other than the statutory minimum bonus is at the discretion of the petitioner company and should be borne out of its profits or incentive earned from the respondents for higher availability of the Transmission System. In view of the above, the incentive and ex gratia payments made by the petitioner to its employees have been kept out of consideration for calculation of employee cost.

34. The petitioner was directed to furnish details of the arrears on account of pay and allowances for the period prior to 1995–1996, but paid between 1995–1996 to 1999–2000. The petitioner has submitted the details of such arrears, amounting to Rs. 25.11 lakh and Rs. 137.56 lakh paid for Southern Region during 1995–1996 and 1996–1997. Similarly, the arrears for the previous years included in the employee cost for 1995–1996 and 1996–1997 for Corporate Office were stated to be Rs. 9.61 lakh and Rs. 35.60 lakh. The petitioner has also submitted that the arrears on account of pay revision from 01.01.97 to 31.03.2000 have been paid during the years 2000–2001 and 2001–2002 also. The amounts of these arrears as claimed by the petitioner are Rs. 200.55 lakh and Rs. 146.41 lakh for Southern Region and Rs. 297.13 lakh and Rs. 109.95 lakh for the Corporate Office for the years 2000–2001 and 2001–2002 respectively. The petitioner has prayed that the arrears on account of pay and allowances for the period prior to 1995–1996 should be deducted while those pertaining to the period from 1995–1996 to 1999–2000 but paid subsequent to 1999–2000 should be added to O&M charges. The petitioner has argued that since these pay arrears pertain to the period being considered for fixation of normative O&M, the arrears should be considered while fixing the normative O&M. We find the submission of the petitioner to be logical and have considered the submission in the calculation of employee cost.

Repair & Maintenance Expenses

35. Repair & maintenance expenses as claimed by the petitioner have been considered. It was noted that in case of Southern Region system for the year 1998–1999 the increase over the previous year (1997–1998) was 86.89%. The petitioner was asked to explain the individual items of expenditure in which variation over the previous year was more than 20%. The petitioner has explained that the excess of 86.89% in the year 1998–1999 under “repair and maintenance” head over the previous year was due to major repair of circuit breaker at Cuddapah sub-station and two towers in the Ramagundam-Chandrapur transmission line undertaken during 1998–1999. Major repair is not a regular phenomenon, and hence expenses on this account have to be excluded from the process of normalisation. Therefore, “repair and maintenance” expenses in 1998–1999 have been limited to Rs. 328.79 lakh (20% over and above the “repair and maintenance” expenses for the year 1997–1998). However, if any major repairs are undertaken during the tariff period covered by this order, the petitioner may approach the Commission with proper justification to claim the actual expenses as a part of O&M expenses.

Power Charges

36. In case of Corporate Office, the power charges as claimed by the petitioner have been considered in the calculation of O&M expenses. As regards Southern Regional Transmission System (for short “the SRTS”) the petitioner was directed to submit break up of power charges between sub-station facilities and residential colonies. The petitioner expressed its inability to furnish the data as it was not maintained. However, the petitioner has furnished details of power consumption for the residential colony in Western and Eastern Regions, which work out to be in the range of 20% of the total power charges. On the same basis, the power charges for the residential colony have been considered as 20% of total power charges claimed for Southern Region. As power charges for the residential colony need to be recovered from the employees, admissibility of power charges in case of the SRTS has been limited to 80% of the total claim.

Insurance

37. It has been noted that the petitioner has a policy of self-insurance for which it has created the insurance reserve. The insurance charges claimed by the petitioner are credited to the insurance reserve. The petitioner was directed to furnish the management policy on creation of insurance reserve, items of loss secured and the conditions thereto. The petitioner has submitted insurance policy of the petitioner company under affidavit dated 6.2.2003 The key features of the policy submitted by the petitioner are as under:

(a) Insurance reserve is created @ 0.1% on gross value of fixed assets at the close of the year, to meet the future losses arising from uninsured risks, except machinery breakdown for valve hall of HVDC, and fire risk of HVDC equipment and SVC sub-stations.

(b) The policy generally covers following:

(i) Fire, lightning, explosion/implosion, and bush fire

(ii) Natural calamity: flood, earthquake, storm, cyclone, typhoon, tempest, hurricane, tornado, subsidence and landslide

(iii) Riot, strike/malicious and terrorist damage

(iv) Theft, burglary, Missile testing equipment, impact damage due to rail/road or animal, aircraft and articles dropped there from.

(c) The losses of assets caused by the above causes are adjusted against insurance reserve as per the corporation guidelines.

(d) The amount so set aside in the insurance reserve has not been separately claimed from the respondents and the expenses have been met from the permitted O&M charges under the tariff.

38. The petitioner has stated that the policy of self-insurance has also been followed by NHPC, where 0.5% per annum of the gross block of O&M projects is transferred to self-insurance reserve account. It has also been informed that the rate of 0.1% as booked under O&M expenses towards self-insurance reserve is lower than the insurance premium (0.22%) being charged by the insurance companies for the risks covered in the self-insurance policy. In support of this claim, the petitioner has placed on record a letter from Reliance General Insurance Company quoting for the insurance rate of the assets covered in the self-insurance policy of the petitioner company.

39. In view of the explanation furnished on behalf of the petitioner, the insurance charges as claimed have been considered in O&M expenses. We, however, make it explicit that the self-insurance provided by the petitioner is for replacement of the damaged assets and the beneficiaries shall not be charged anything in case of damage due to any of the events mentioned in the insurance policy.

40. In case of Training & Recruitment expenses, Communication expenses, Traveling, Rent, and Miscellaneous Expenses as claimed by the petitioner have been considered for calculation, both in the case of the SRTS as well as Corporate Office.

Other Expenses

41. In case of the SRTS, the other expenses as claimed by the petitioner have been considered for the calculation. However, in case of Corporate Office, following expenses have not been admitted for reimbursement:

(a) Donation of Rs. 0.05 lakh, Rs. 30 lakh, Rs. 34.78 lakh and Rs. 600.03 lakh for the years 1995–1996, 1996–1997, 1898–1999 and 1999–2000, as these donations are not related to transmission business. The expenditure on account of the donations need be borne by the petitioner out of other profits of the corporation.

(b) Provisions of Rs. 1107.61 lakh, Rs. 385.8 lakh and Rs. 0.27 lakh for the year 1996–1997, 1997–1998 and 1999–2000. These provisions were made for the loss of stores in Eastern Region and North Eastern Region, for bad and doubtful debt in Northern Region and for shortage of store in North Eastern Region. As all these items are controllable by the petitioner and reflect the managerial efficiency. However, an amount of Rs. 11.14 lakh on account of fire at the corporate office in 1998–1999 has been considered as admissible under the head provisions.

(c) Legal expenses amounting to Rs. 2.65 lakh in the Corporate Office on legal opinion on CERC matters have not been allowed in line with the Commission's policy of allowing only the fees for the petitions filed in the Commission. However, other legal expenses for disputes related to compensation, contracts, service matters and labour cases have been admitted.

Recoveries

42. The details of the recoveries for the SRTS and the Corporate Office were furnished by the petitioner vide affidavit dated 6th February 2003. The petitioner in the aforesaid affidavit also furnished the “complete details” of the recoveries for the SRTS. According to the petitioner, the income from sale of bid documents has already been adjusted for under the sub-head Tender Expenses under the head Other Expenses. Hence, income under this sub-head has not been considered in the recovery for the SRTS as well as Corporate Office. Similarly, electricity charges recovered from employees residential buildings and other residential buildings have not been considered under the head “recovery” as 20% of the power charges for colony consumption have been deducted in case of the SRTS.

Allocation of Corporate Office Expenses to Various Regions

43. The petitioner has submitted the method for allocation of Corporate Office expenses to various Regions. The key steps in the apportionment of Corporate Office expenses among the regions are as under:

i) Expenses booked under Training & Recruitment, Directors sitting fees, provisions, R&D, Write off of fixed assets/non-operating expenses and donations are considered exclusively as O&M expenses.

ii) After deducting these exclusive O&M expenses, the balance Corporate Office expenses are allocated in the ratio of Transmission charges to annual Capital outlay to obtain expenses allocated to O&M and construction activity.

iii) The allocation to O&M activity obtained in step (ii) is added to exclusive O&M expenses obtained in step (i) to arrive at total O&M expenses in the Corporate Office.

iv) RLDC expenses are then deducted from the total O&M expenses obtained in step (iii) to arrive at O&M expenses allocated to transmission business.

v) O&M expenses allocated to transmission business are then allocated to various regions in the ratio of their respective transmission charges.

44. The methodology adopted by the petitioner for allocation of Corporate Office O&M expenses has been approved and followed in the calculation of O&M expenses. The comparative statement of O&M expenses claimed by the petitioner and those allowed and considered for the years 1995–1996 to 1999–2000 for the purpose of computation of O&M expenses for the tariff period are given herein below:

DETAILS OF O&M EXPENSES FOR POWERGRID SYSTEM IN SOUTHERN REGION

(All Figures in Rs. Lakhs)

1995–1996 1996–1997 1997–1998 1998–1999 1999–2000 Items As per Petitioner As allowed for As per Petitioner As allowed for As per Petitioner As allowed for As per Petitioner As allowed for As per Petitioner As allowed for Employee Cost 769.63 649.53 1136.39 921.70 1334.83 1333.85 1574.20 1592.55 2211.72 1928.38 Repair & Maintenance 235.50 235.50 246.70 246.70 273.99 273.99 512.07 328.79 404.38 404.38 Power Charges 305.98 244.78 358.13 286.50 415.20 332.16 418.15 334.52 488.85 391.08 Training & Recruitment 18.54 18.54 16.53 16.53 13.13 13.13 7.13 7.13 12.98 12.98 Communications 63.46 63.46 60.08 60.08 73.54 73.54 67.67 67.67 71.27 71.27 Travelling 205.46 205.46 231.33 231.33 288.09 288.09 290.72 290.72 318.89 318.89 Printing & Stationery 18.47 18.47 18.38 18.38 22.87 22.87 22.70 22.70 24.79 24.79 Rent 12.26 12.26 11.38 11.38 14.23 14.23 17.72 17.72 20.80 20.80 Miscellaneous Expenses 185.42 185.42 200.45 200.45 244.80 244.80 272.85 272.85 322.12 322.12 Insurance 7.22 7.22 11.60 11.60 272.68 272.68 158.87 158.87 219.00 219.00 Others 59.61 59.61 41.61 41.61 48.66 48.66 167.97 167.97 401.65 401.65 Corporate Expenses Allocation 454.10 444.48 532.15 261.90 508.85 438.93 485.91 484.84 745.19 602.61 TOTAL 2335.65 2144.74 2864.73 2308.17 3510.87 3356.93 3995.96 3746.33 5241.64 4717.95 Less: Recoveries 14.91 87.92 26.53 21.97 16.24 Net O&M Expenses 2335.65 2129.83 2864.73 2220.25 3510.87 3330.40 3995.96 3724.36 5241.64 4701.71

Method of Normalizing O&M Expenses

45. The following formulae for calculation of normative O&M expenses as per the notification dated 26.3.2001, as amended vide Central Electricity Regulatory Commission (Terms and Conditions of Tariff) (Second Amendment) Regulations, 2003 published in the Gazette of India on 2.6.2003 have been followed

Where:

AVOMLL and AVOMBN are average normalized O&M expenses per Ckt. km of line length and per bay respectively.

OMLi and OMSi are O&M expenses for the lines and for the substations for the ith year respectively.

LLi and BNi are the total line length in Ckt. km and total number of bays in the ith year respectively.

46. As per the above method, AVOMLL and AVOMBN are calculated based on the data for the years 1995–1996 to 1999–2000. These normalized averages correspond to the year 1997–1998. After escalating these averages by 10% per annum for two years, the normative O&M expenses for the base year 1999–2000 have been obtained. Normative O&M expenses for subsequent years are obtained by escalating these normative figures by 6% per annum. Following table gives comparison of the normative O&M expenses as calculated by the petitioner and as per our calculations allowed for the base year i.e 1999–2000 and afterwards:

NORMALIZED O&M EXPENSES FOR SOUTHERN REGION

(All Figures in Rs. Lakhs)

S. NO. Items 1995–1996 1996–1997 1997–1998 1998–1999 1999–2000 Total for five years 95-96 to 99-00 99-00 2000–2001 2001–2002 2002–2003 2003–2004 1 Total O&M expenses (Rs. in lakh) 4147.48 4336.62 6100.85 6676.57 7137.32 2 Abnormal O&M expenses 0.00 0.00 57.64 107.13 99.08 263.85 3 Normal O&M expenses (S. No. 1-S. NO. 2) 4147.48 4336.62 6043.21 6569.44 7038.24 4 OML (O&M for lines) = 0.7 × S. NO. 3 2903.24 3035.63 4230.25 4598.61 4926.77 19694.50 5 OMS (O&M for substation) = 0.3×S. NO. 3 1244.24 1300.99 1812.96 1970.83 2111.47 8440.49 6 Line length at beginning of the year in Kms. 9622.13 9622.13 9743.48 10561.88 10819.55 7 Line length added in the year in Kms. 0.00 121.35 818.40 257.67 1705.07 8 Line length at end of the year in Kms. 9622.13 9743.48 10561.88 10819.55 12524.62 9 LL (Average line length in the Region) 9622.13 9682.81 10152.68 10690.72 11672.09 51820.43 10 NO. of bays at beginning of the year 157 157 161 183 185 11 NO. of bays added in the year 0 4 22 2 31 12 NO. of bays at the end of the year 157 161 183 185 216 13 BN (Average number of bays in the Region) 157.0 159.0 172.0 184.0 200.5 872.50 14 AVOMLL(OML/LL) 0.302 0.314 0.417 0.430 0.422 1.884 15 AVOMBN(OMS/BN) 7.925 8.182 10.540 10.711 10.531 47.890 16 NOMLL (allowable O&M per unit of line length) 0.3768 0.4145 0.4560 0.4560 0.4833 0.5123 0.5431 0.5756 17 NOMBN (Allowable O&M per bay) 9.5780 10.5358 11.5894 11.5894 12.2847 13.0218 13.8031 14.6313 NOMLL (as calculated by petitioner) 0.42 0.51 0.54 0.57 0.60 0.64 NOMBN (as calculated by petitioner) 10.75 13.01 13.79 14.62 15.50 16.43

47. The differences in NOMLL and NOMBN as calculated by the petitioner and as allowed are mainly on account of certain expenses disallowed by us as explained in preceding paragraphs. Using these normative values, O&M charges have been calculated.

48. In our calculations the escalation factor of 6% per annum has been used. In accordance with the notification dated 26.3.2001, if the escalation factor computed from the observed data lies in the range of 4.8% to 7.2%, this variation shall be absorbed by the petitioner. In case of deviation beyond this limit, adjustment shall be made on by applying actual escalation factor arrived at on the basis of weighted price index of CPI for industrial workers (CPMW) and index of selected component of WPI (WPI_TR).

49. The details of O&M expenses allowed are given hereunder:

2001–2002 2002–2003 2003–2004 Line length in Ckm No. of bays O&M expenses (Rs. in lakh) Line length in Ckm No. of bays O&M expenses (Rs. in lakh) Line length in Ckm No. of bays O&M expenses (Rs. in lakh) 122.33 0 61.5795 122.33 0 65.2743 122.33 0 69.1908

RETURN ON EQUITY

50. As per the notification dated 26.3.2001, return on equity shall be computed on the paid up and subscribed capital and shall be 16% of such capital. It further provides that premium raised by the Transmission Utility while issuing share capital & investment of internal resources created out of free reserve of the existing utility, if any, for the funding of the project, shall also be reckoned as paid up capital for the purpose of computing the return on equity, provided such premium amount and internal resources are actually utilised for meeting the capital expenditure of the Transmission project and forms part of the approved financial package as set out in the techno-economic clearance accorded by the Authority.

51. The petitioner has claimed return on the basis of equity as was admitted in Ministry of Power notifications dated 20.7.1998 and 1.12.1998 along with notional equity arising out of FERV claimed. The same methodology has been followed for working out the return on equity. Thus the following amount of equity has been considered in the calculation of return of equity:

(Rs. in lakh)

Equity as allowed by the Commission vide order dated 17.6.2003 for previous tariff setting 2492.66 Notional Equity arising on account of FERV 6.24 TOTAL 2498.90

52. On the above basis, the petitioner shall be entitled to return on equity of Rs. 399.82 lakh each year during the tariff period.

INTEREST ON WORKING CAPITAL

53. As provided in the notification dated 26.3.2001, the interest on working capital shall cover:

(a) Operation and maintenance expenses (cash) for one month;

(b) Maintenance spares at a normative rate of 1% of the capital cost less 1/5th of the initial capitalised spares. Cost of maintenance spares for each subsequent year shall be revised at the rate applicable for revision of expenditure on O&M of the transmission system; and

(c) Receivables equivalent to two months' average billing calculated on normative availability level, which is 98%.

54. The petitioner has claimed the maintenance spares on the basis of maintenance spares allowed by the Commission in its order dated 17.6.2003 in petition No. 19/2000 with escalation @ 6% p.a for the years 2001–2002 to 2003–2004 and deducting the 1/5th of the initial capitalized spares therefrom. The petitioner's claim for O&M expenses is based on the petition. The petitioner has further claimed the receivables on the basis 2 months' of annual transmission charges as claimed in the petition.

55. In keeping with the methodology prescribed in the notification dated 26.3.2001, working capital has been worked out. In the calculation, maintenance spares for the year 2001–2002 to 2003–2004 have been worked out on the basis of capital expenditures up to 31.03.2001 allowed by the Commission earlier, and after deduction of 1/5th of the initial capitalised spares therefrom. This has been escalated at the rate of 6% per annum. In the calculation, O&M expenses for working capital has been worked out for 1 month of O&M expenses considered in tariff of the respective year. The receivables have been worked out on the basis 2 months' of annual transmission charges as worked out above.

56. The petitioner has claimed interest on working capital at the rate of 11.5%, based on annual SBI PLR for the year 2001–2002, which has been allowed separately by the Commission in certain other petitions and, therefore, the same has been allowed here also despite the objection of some of the respondents. The detailed calculations in support of interest on Working Capital are as under:

Interest on Working Capital

(Rs. In lakh)

Escalation for Maintenance Spares 6% Period in 2000–2001 1.00 On Capital Expenditures up to 31.03.2000 57.59 On Capital Expenditures during the year 2000–2001 0.11 Maintenance Spares 57.70 Less: 1/5th of Initial Spares 0.00 Maintenance Spares 57.70 61.16 64.83 68.72 O&M expenses 5.13 5.44 5.77 Receivables 158.18 116.76 116.80 Total 224.47 187.02 191.28 Rate of Interest 11.50% 11.50% 11.50% Interest 25.81 21.51 22.00

TRANSMISSION CHARGES

57. In the light of above discussion, we approve the transmission charges as given in the Table below:

(Rs. in lakh)

Transmission Tariff 2001–2002 2002–2003 2003–2004 Interest on Loan 196.54 62.81 58.64 Interest on Working Capital 25.81 21.51 22.00 Depreciation 151.12 151.12 151.12 Advance against Depreciation 114.21 0.00 0.00 Return on Equity 399.82 399.82 399.82 O&M Expenses 61.58 65.27 69.19 Total 949.09 700.53 700.77

58. In addition to the transmission charges, the petitioner shall be entitled to other charges like Development Surcharge, income tax, incentive, surcharge and other cess and taxes in accordance with the notification dated 26.3.2001 subject to directions if any, of the superior courts. The petitioner shall also be entitled to recovery of filing fee of Rs. 2 lakh, which shall be recovered from the respondents in five monthly installments of Rupees forty thousand each and shall be shared by the respondents in the same ratio as other transmission charges.

59. The petitioner is already billing the respondents on provisional basis in accordance with the Commission's notification dated 4.4.2001 as extended from time to time. The provisional billing of tariff shall be adjusted in the light of final tariff now approved by us.

60. The transmission charges approved by us shall be included in the regional transmission tariff for Southern Region and shall be shared by the respondents in accordance with the notification dated 26.3.2001

61. This order disposes of Petition No. 40/2002.