The petition has been filed for approval for transmission charges for 400 kV D/C Kaiga-Sirsi transmission line along with associated bays (the transmission line) in Southern Region for the period from 1.4.2004 to 31.3.2009, based on the Central Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations, 2004, (hereinafter referred to as “the 2004 regulations”). The petitioner has also prayed that it be permitted to continue the billing of transmission charges on the same basis as charged on 31.3.2004, pending determination of tariff in the present petition. No other specific relief is prayed for.

2. I.A No. 34/2005 has been filed for approval of additional capital expenditure for the period 1.4.2001 to 31.3.2004 and consequent revision of tariff. I.A was heard along with main petition, after notice.

3. The approval for the revised cost estimate (completed cost) of the transmission line of Rs. 57.53 crore was accorded by the Board of Directors of the petitioner company in its 131st meeting held on 13.6.2002 The date of commercial operation of the transmission line with line length of 122.33 ckt-kms (for O&M) is 1.12.1999

4. The annual transmission charges for the period from 1.4.2001 to 31.3.2004 were decided by the Commission in its order dated 30.6.2003 in petition No. 40/2002 at a gross block of Rs. 5682.84 lakh.

5. The petitioner has claimed the transmission charges as under:

(Rs. in lakh)

2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 Depreciation 152.62 152.62 152.62 152.62 152.62 Interest on Loan 43.28 35.96 28.64 21.32 14.00 Return on Equity 359.00 359.00 359.00 359.00 359.00 Advance against Depreciation 0.00 0.00 0.00 0.00 0.00 Interest on Working Capital 18.06 18.42 18.81 19.23 19.69 O & M Expenses 27.77 28.87 30.09 31.19 32.54 Total 600.73 594.87 589.16 583.36 577.85

6. The details submitted by the petitioner in support of its claim for interest on working capital are given hereunder:

(Rs. in lakh)

2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 Maintenance Spares 73.73 78.16 82.85 87.82 93.09 O & M expenses 2.31 2.41 2.51 2.60 2.71 Receivables 100.12 99.15 98.19 97.23 96.31 Total 176.17 179.71 183.55 187.65 192.11 Rate of Interest 10.25% 10.25% 10.25% 10.25% 10.25% Interest 18.06 18.42 18.81 19.23 19.69

7. The replies to the petition have been filed by Tamil Nadu State Electricity Board and Kerala State Electricity. No comments or suggestion have been received from the general public in response to the notices published by the petitioner under section 64 of the Electricity Act, 2003.

Additional Capitalisation - 2001–2004

8. The petitioner has sought approval of tariff after accounting for additional capital expenditure of Rs. 70.40 lakh incurred on account of left over/balance payments for the transmission line/sub-stations as per details given below:

S. No. Year Amount claimed (Rs. in lakh) Nature of expenditure 1. 2001-2002 5.60 Final payment for the transmission line 2. 2002-2003 19.22 Capitalization of initial spares 3. 2003-2004 45.58 Compensation payment for transmission line Total 70.40

9. The expenditure was not considered by the Commission in its order dated 30.6.2003 ibid while approving tariff for the period ending 31.3.2004 The capital expenditure claimed is found to be in order as it is against the committed liability and is within the original scope of work. Accordingly, the additional capital expenditure of Rs. 70.40 lakh is approved. It is also noted that the initial spares were not capitalized by the petitioner at the time of the commercial operation. Therefore, their capitalization during 2002–2003 is in order.

CAPITAL COST

10. As per clause (2) of Regulation 52 of the 2004 regulations in case of the projects existing up to 31.3.2004, the project cost admitted by the Commission for determination of tariff prior to 1.4.2004 shall form the basis for determination of tariff.

11. The petitioner has considered the capital expenditure of Rs. 5741.78 lakh after accounting for additional capitalization of Rs. 70.40 lakh on works and decapitalization of Rs. 11.46 lakh on account of FERV of for the period 1.4.2001 to 31.3.2004 over the capital expenditure of Rs. 5682.84 lakh admitted by the Commission in the order dated 30.6.2003 ibid.

Extra Rupee Liability during the years 2001–04:

12. Regulation 1.13 (a) of the Central Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations, 2001 provided as under:

(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

13. Regulation 1.7 of the 2001 further provided that recovery of foreign exchange rate variation would be done directly by the utilities from the beneficiaries without filing a petition before the Commission. In case of any objections by the beneficiaries to the amounts claimed on these counts, they may file an appropriate petition before the Commission.

14. Despite the objections raised by the TNEB and KPTCL to the petitioner's claim for de-capitalization of Rs. 11.46 lakh on account of FERV, we allow de-capitalization as the petitioner's claim in this regard is based on the provision of the terms and conditions of tariff applicable during 1.4.2001 to 31.3.2004, reproduced above. FERV worked out by the petitioner is matching with calculations submitted, and is in accordance with provisions of AS-11, applicable for the period up to 31.3.2004 The petitioner's claim for de-capitalization of Rs. 11.46 lakh on account of FERV has accordingly been considered for tariff calculations.

15. Based on the above, after adjustment of additional capitalization of Rs. 70.40 lakh on works and de-capitalization of FERV of Rs. 11.47 lakh, the gross block as on 1.4.2004 comes to Rs. 5741.78 lakh.

DEBT-EQUITY RATIO

16. Regulation 54 of the 2004 regulations inter alia provides that,—

(1) In case of the existing project, debt-equity ratio Considered by the Commission for fixation of tariff for the period ending 31.3.2004 shall be considered for determination of tariff.

(2) In case of the transmission system for which investment approval was accorded prior to 1.4.2004 and which is likely to be declared under commercial operation during the period 1.4.2004 to 31.3.2009, debt-equity in the ratio of 70:30 shall be considered:

Provided that where deployment of equity is less than 30%, the actual equity deployed shall be considered for the purpose of determination of tariff.

Provided further that the Commission may in appropriate case consider equity higher than 30% for the purpose of determination of tariff, where the transmission licensee is able to establish to the satisfaction of the Commission that deployment of equity more than 30% was in the interest of general public;

(3) In case of the transmission system for which investment approval is accorded on or after 1.4.2004, debt-equity in the ratio of 70:30 shall be considered for the purpose of determination of tariff:

Provided that where deployment of equity is less than 30%, the actual equity deployed shall be considered for the purpose of determination of tariff.

(4) The debt and equity amount arrived at in accordance with above sub-clause (1), (2) or (3), as the case may be, shall be used for calculation of interest on loan, return on equity, advance against depreciation and foreign exchange rate variation.”

17. The petitioner has claimed tariff based on debt-equity ratio of 56.03:43.97 as considered by the Commission in its order dated 30.6.2003 ibid. The entire amount of Rs. 70.40 on account of additional capitalisation during 2001–2002 to 2003–2004 has been taken as equity by the petitioner and de-capitalised amount of Rs. 11.47 lakh on account of FERV has been apportioned between debt and equity in the same ratio as considered in the order dated 30.6.2003 Based on this, Rs. 2564.25 lakh as on 1.4.2004 has been taken as the equity by the petitioner for the purpose of determination of tariff in the present petition.

18. The petitioner has stated in the petition that the approved debt-equity ratio is 75.00:25.00 Therefore, in order to bring debt and equity as close to the approved debt-equity ratio as possible, the amounts of Rs. 70.40 lakh capitalized on account of works is deemed to have been financed through loan and decapitalization of Rs. 11.46 lakh on account of FERV has been adjusted against equity. Accordingly, for the purpose of tariff, an amount of Rs. 2487.43 lakh has been considered as equity as on 1.4.2004 against the equity of Rs. 2498.90 lakh considered in the order dated 30.6.2003

RETURN ON EQUITY

19. As per clause (iii) of Regulation 56 of the 2004 regulations, return on equity shall be computed on the equity base determined in accordance with regulation 54 @ 14% per annum. Equity invested in foreign currency is to be allowed a return in the same currency and the payment on this account is made in Indian Rupees based on the exchange rate prevailing on the due date of billing.

20. The petitioner has claimed return on equity of Rs. 2564.25 lakh after accounting for equity of Rs. 70.40 lakh on account of additional capitalization on works for the period 1.4.2001 to 31.3.2004 and Rs. 5.05 lakh on account of proportionate decapitalization of FERV, over equity of Rs. 2498.90 lakh considered in the order dated 30.6.2003 ibid. For the reasons given hereinabove in para 18, we have taken equity of Rs. 2487.43 lakh. Accordingly, the petitioner shall be entitled to return on equity @ Rs. 348.24 lakh each year during the tariff period.

INTEREST ON LOAN

21. Clause (i) of regulation 56 of the 2004 regulations inter alia provides that,—

(a) Interest on loan capital shall be computed loan wise on the loans arrived at in the manner indicated in regulation 54.

(b) The loan outstanding as on 1.4.2004 shall be worked out as the gross loan as per regulation 54 minus cumulative repayment as admitted by the Commission for the period up to 31.3.2004 The repayment for the period 2004–09 shall be worked out accordingly on normative basis.

(c) The transmission licensee shall make every effort to swap the loan as long as it results in net benefit to the long-term transmission customers. The costs associated with such swapping shall be borne by the long-term transmission customers.

(d) The changes to the loan terms and conditions shall be reflected from the date of such swapping and benefits passed on to the beneficiaries.

(e) In case any moratorium period is availed of by the transmission licensee, depreciation provided for in the tariff during the years of moratorium shall be treated as repayment during those years and interest on loan capital shall be calculated accordingly.

22. The petitioner has claimed interest on loan in the following manner:

(i) Gross loans, cumulative loan repayment up to 31.3.2004 and outstanding balance up to that year as admitted by the Commission in the order dated 21.2.2005 have been taken.

(ii) On the basis of actual rate of interest on actual average loan, the weighted average rate of interest on loan is worked out for various years.

(iii) Loans as admitted by the Commission in the order dated 21.2.2005 ibid has been considered as notional loan and the weighted average rate of interest on loan for respective years as per above has been has been multiplied to arrive at interest on loan.

(iv) Notional loan component of FERV up to 31.3.2001 has been considered separately and actual applicable rate of interest on foreign loan have been considered to workout the interest on this component

23. In our calculation, the interest on loan has been worked out as detailed below:

(i) Details of net outstanding loan as on 31.3.2004, repayment schedule for the period 2004–09, rate of interest as on 1.4.2004, exchange rate as on 31.3.2004 etc. have been taken from the loan allocation statement submitted by the petitioner for working out weighted average rate of interest.

(ii) Gross loan and cumulative repayment up to 31.3.2004 has been taken from the order dated 30.6.2003

(iii) Notional loan of Rs. 70.40 lakh arising out of additional capitalisation during the years 2001–04 has been considered.

(iv) Repayment of notional loan arising due to additional capitalisation during the years 2001–04 has been worked out in proportion to the repayment of actual loan during these years.

(v) Tariff is worked out considering normative loan and normative repayments. Once the normative loan is arrived at, it is considered for all purposes in the tariff. Normative repayment is worked out by the following formula:

(vi) Moratorium in repayment of loan is considered with reference to normative loan and if the normative repayment of loan during the year is less than the depreciation during the year, it is considered as moratorium and depreciation during the year is deemed as normative repayment of loan during the year.

(vii) Weighted average rate of interest on actual loan worked out as per (i) above is applied on the average loan during the year to arrive at the interest on loan.

24. Based on the above, the year-wise details of interest worked out are given hereunder:

(Rs. in lakh)

Details of loan Up to 31.3.2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 Interest on Loan Gross loan as per order dated 30.6.2003 3183.95 Addition due to additional capitalisation 70.40 Addition due to FERV 0.00 Gross Normative Loan 3254.35 3254.35 3254.35 3254.35 3254.35 3254.35 Cumulative Repayment up to Previous Year 2595.76 2748.38 2901.00 3053.63 3206.25 Net Loan-Opening 658.59 505.97 353.34 200.72 48.10 Repayment during the year 152.62 152.62 152.62 152.62 48.10 Net Loan-Closing 505.97 353.34 200.72 48.10 0.00 Average Loan 582.28 429.65 277.03 124.41 24.05 Weighted Average Rate of Interest on Loan 7.8196% 7.5944% 7.2777% 6.7996% 5.9946% Interest 45.53 32.63 20.16 8.46 1.44

DEPRECIATION

25. Sub-clause (a) of clause (ii) of Regulation 56 of the 2004 regulations provides for computation of depreciation in the following manner, namely:

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

(ii) Depreciation shall be calculated annually based on straight line method over the useful life of the asset and at the rates prescribed in Appendix II to these regulations. The residual value of the asset shall be considered as 10% and depreciation shall be allowed up to maximum of 90% of the historical capital cost of the asset. Land is not a depreciable asset and its cost shall be excluded from the capital cost while computing 90% of the historical cost of the asset. The historical capital cost of the asset shall include additional capitalisation on account of Foreign Exchange Rate Variation up to 31.3.2004 already allowed by the Central Government/Commission.

(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.

26. The gross depreciable value of the asset, as per (ii) above, is 0.9 × Rs. 5741.78 lakh = Rs. 5167.60 lakh. Cumulative depreciation and AAD recovered in tariff up to 31.3.2004 is Rs. 979.84 lakh. Remaining depreciable value as on 1.4.2004 is thus Rs. 4187.76 lakh.

27. For the period 1.4.2004 to 31.3.2009 the depreciation works out to Rs. 152.62 lakh each year by applying rate of depreciation of 2.65% as shown below:

(Rs. in lakh)

Details of Depreciation Up to 31.3.2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 As per order dated 30.6.2003 5682.84 Addition during 200104 due to Additional Capitalisation 70.40 Addition during 200104 due to FERV (−)11.46 Gross Block as on 31.3.2004 5741.78 5741.78 5741.78 5741.78 5741.78 5741.78 Rate of Depreciation 2.65% Depreciable Value 90% 5167.60 5167.60 5167.60 5167.60 5167.60 Balance Useful life of the asset — — — — — — Remaining Depreciable Value 4187.77 4035.14 3882.52 3729.90 3577.27 Depreciation 152.62 152.62 152.62 152.62 152.62

ADVANCE AGAINST DEPRECIATION

28. As per sub-clause (b) of clause (ii) of Regulation 56 of the 2004 regulations, in addition to allowable depreciation, the transmission licensee is entitled to Advance Against Depreciation, computed in the manner given hereunder:

AAD = Loan repayment amount as per regulation 56(i) subject to a ceiling of 1/10th of loan amount as per regulation 54 minus depreciation as per schedule

29. It is provided that Advance Against Depreciation shall be permitted only if the cumulative repayment up to a particular year exceeds the cumulative depreciation up to that year. It is further provided that Advance Against Depreciation in a year shall be restricted to the extent of difference between cumulative repayment and cumulative depreciation up to that year.

30. The petitioner has not claimed Advance Against Depreciation. Accordingly, Advance Against Depreciation has not been considered in tariff.

OPERATION&MAINTENANCE EXPENSES

31. In accordance with clause (iv) of Regulation 56 the 2004 regulations, the following norms are prescribed for O&M expenses

Year 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 O&M expenses (Rs. in lakh per ckt-km) 0.227 0.236 0.246 0.255 0.266 O&M expenses (Rs in lakh per bay) 28.12 29.25 30.42 31.63 32.90

32. The petitioner has claimed O&M expenses for 122.33 ckt-kms of line length, which has been allowed. Accordingly, the petitioner's entitlement to O&M expenses has been worked out as given hereunder:

(Rs. in lakh)

Year 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 O&M expenses for 122.33 ckt-kms line length 27.77 28.87 30.09 31.19 32.54 Total 27.77 28.87 30.09 31.19 32.54

33. The petitioner has submitted that the wage revision of its employees is due with effect from 1.1.2007 Therefore, O&M expenses should be subject to revision on account of revision of employee cost from that date. In the alternative, it has been prayed that the increase in employee cost due to wage revision be allowed as per actuals for extra cost to be incurred consequent to wage revision. We are not expressing any view, as this issue does not arise for consideration at this stage. The petitioner may approach for a relief in this regard at an appropriate stage in accordance with law.

INTEREST ON WORKING CAPITAL

34. The components of the working capital and the interest thereon are discussed hereunder:

(i) Maintenance spares

Regulation 56(v)(1)(b) of the 2004 regulations provides for maintenance spares @ 1% of the historical cost escalated @ 6% per annum from the date of commercial operation. In the present case, element-wise capital expenditure on the date of commercial operation is Rs. 5606.04 lakh, which has been considered as the historical cost for the purpose of the present petition and maintenance spares haven worked out accordingly by escalating 1% of the historical cost @ 6% per annum. In this manner, the value of maintenance spares works out to Rs. 72.19 lakh as on 1.4.2004

(ii) O&M expenses

Regulation 56(v)(1)(a) of the 2004 regulations provides for operation and maintenance expenses for one month as a component of working capital. The petitioner has claimed O&M expenses for 1 month of O&M expenses of the respective year as claimed in the petition. This has been considered in the working capital.

(iii) Receivables

As per Regulation 56(v)(1)(c) of the 2004 regulations, receivables will be equivalent to two months average billing calculated on target availability level. The petitioner has claimed the receivables on the basis 2 months' transmission charges claimed in the petition. In the tariff being allowed, receivables have been worked out on the basis 2 months' transmission charges.

(iv) Rate of interest on working capital

As per Regulation 56(v)(2) of the 2004 regulations, rate of interest on working capital shall be on normative basis and shall be equal to the short-term Prime Lending Rate of State Bank of India as on 1.4.2004 or on 1st April of the year in which the project or part thereof (as the case may be) is declared under commercial operation, whichever is later. The interest on working capital is payable on normative basis notwithstanding that the transmission licensee has not taken working capital loan from any outside agency. The petitioner has claimed interest on working capital @ 10.25% based on SBI PLR as on 1.4.2004, which is in accordance with the 2004 regulations and has been allowed.

35. The necessary computations in support of interest on working capital are appended hereinbelow:

(Rs. in lakh)

2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 Maintenance Spares 72.19 76.52 81.11 85.98 91.14 O & M expenses 2.31 2.41 2.51 2.60 2.71 Receivables 98.65 96.73 94.90 93.19 92.32 Total 173.16 175.66 178.52 181.77 186.17 Rate of Interest 10.25% 10.25% 10.25% 10.25% 10.25% Interest 17.75 18.00 18.30 18.63 19.08

TRANSMISSION CHARGES

36. The capital cost and other relevant details are contained in the summary sheet attached. The transmission charges being allowed for transmission line are summarised below:

(Rs. in lakh)

2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 Depreciation 152.62 152.62 152.62 152.62 152.62 Interest on Loan 45.53 32.63 20.16 8.46 1.44 Return on Equity 348.24 348.24 348.24 348.24 348.24 Advance against Depreciation 0.00 0.00 0.00 0.00 0.00 Interest on Working Capital 17.75 18.00 18.30 18.63 19.08 O & M Expenses 27.77 28.87 30.09 31.19 32.54 Total 591.91 580.37 569.41 559.14 553.93

37. In addition to the transmission charges, the petitioner shall be entitled to other charges like income-tax, incentive, surcharge and other cess and taxes in accordance with the 2004 regulations. These transmission charges shall be included in the regional transmission tariff for Southern Region and shall be shared by the regional beneficiaries in accordance with the 2004 regulations.

Impact of additional capitalization for the years 2001–04

38. In the petitions filed by NTPC for approval of revised fixed charges for additional capitalization for the period 1.4.2001 to 31.3.2004, the Commission has decided that additional capital expenditure be added to the gross block as on 1.4.2001 to arrive at gross block as on 1.4.2004 for the purpose of fixation of tariff for the period 2004–2005 to 2008–2009. The Commission has further ordered that NTPC would be entitled to earn return on equity @ 16% on equity portion of additional capitalization approved and interest on loan at the rate as applicable during 2001–2002 to 2003–2004. The return on equity and interest on loan are payable on additional capitalization from 1st April of the financial year following the financial year to which additional capital expenditure relates.

39. Based on the above, the petitioner shall be entitled to recover the following amounts from the respondents through tariff on account of interest on loan on additional loan for the years 2002–2003 and 2003–2004 as shown below:

(Rs. in lakh)

Impact of ACE 2002-2003 2003-2004 Total Interest on Loan 0.18 1.91 2.09 Return on Equity 0.00 0.00 0.00 Total 0.18 1.91 2.09

40. The difference in the petitioner's claim and that allowed by us as, the impact of additional capitalization for the years 2001–04 is for the reason that additional capitalization on works for the years 2001–04 has been taken as loan and decapitalization on account of FERV has been taken as equity to bring the debt-equity ratio close to the approved debt-equity ratio.

41. The petitioner has sought approval for the reimbursement of expenditure of Rs. 67,731/- incurred on publication of notices in the newspapers. The petitioner shall claim reimbursement of the said expenditure directly from the respondents in one installment in the ratio applicable for sharing of transmission charges. The petitioner has also sought reimbursement of filing fee of Rs. 5.20 lakh paid. A final view on reimbursement of filing fee is yet to be taken by the Commission for which views of the stakeholder have been called for. The view taken on consideration of the comments received shall apply in the present case as regards reimbursement of filing fee.

42. The petitioner is already billing the respondents on provisional basis in accordance with the Commission's interim directions. The provisional billing of tariff shall be adjusted in the light of final tariff now approved by us.

43. This order disposes of Petition No. 136/2004 as also I.A No. 34/2005.

Summary Sheet Name of the Company: PGCIL Name of the Element: 400 KV D/C Kaiga-Sirsi Transmission line along with associated bays in Southern Region Actual DOCO: 1.12.1999 Petition No.: 136/2004 Tariff setting Period: 2004-09 (Rs. in lakh) 1 Capital Cost of the Project 5753.00 2 Admitted Capital Cost as on 1.4.2004 for Calculation of Debt and Equity 5682.84 3 Additional Capitalization (works) 70.40 2001-2002 5.60 2002-2003 19.22 2003-2004 45.58 Total 70.40 4 Additional Capitalization (FERV) -11.46 2001-2002 9.28 2002-2003 -5.04 2003-2004 -15.70 Total -11.46 5 Total Capital Cost as on 1.4.2004(2+3+4) 5741.78 6 Means of Finance: Debt 56.68% 3254.35 Equity 43.32% 2487.43 Total 100.00% 5741.78 7 Gross Loan as on 1.4.2004 3254.35 8 Cumulative Repayment up to 31.3.2009: 3254.35 Repaid up to 31.3.2004 2584.70 1.4.2001 to 31.3.2004 (ACE & FERV) 11.06 1.4.2004 to 31.3.2009 658.59 Total 3254.35 9 Balance Loan to be repaid beyond 31.3.2009: 0.00 10 Depreciation recovered up to 31.03.09: 1742.95 Dep AAD Total Recovered up to 31.3.2004 865.42 114.21 979.63 1.4.2001 to 31.3.2004 (ACE & FERV) 0.21 0.00 0.21 1.4.2004 to 31.3.2009 763.12 0.00 763.12 Total 1742.95 11 Balance Depreciation to be recovered beyond 31.3.2009: 3424.65 Capital cost for the purpose of Depreciation 5682.84 ACE + FERV 58.94 Capital cost as 1.4.2004 5741.78 Less: Land Cost 0.00 5741.78 90% of Capital Cost as above 5167.60 Cum. Depreciation to be recovered up to 31.3.09 1742.95 Balance Depreciation to be recovered beyond 31.3.09 3424.65 3424.65