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  • Pramod Deo
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  • R. Krishnamoorthy, Member
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  • V.S Verma, Member
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Citation Codes
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citation codes
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  • Pramod Deo
  • Chairperson
  • R. Krishnamoorthy, Member
  • S. Jayaraman, Member
  • V.S Verma, Member
Acts
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Smart Summary

Structured Summary of the Provided Legal Opinion

Factual and Procedural Background

Tanda TPS (the generating station) was transferred by UPSEB to the petitioner on 14.1.2000 under the UP Electricity Reforms (Transfer of Tanda Undertaking) Scheme, 2000 for Rs. 1000 crore. The petitioner and UPSEB entered into a Power Purchase Agreement dated 7.1.2000 for 25 years from vesting (14.1.2000) under which power generated would be supplied exclusively to UPSEB.

The Commission initially approved tariff for the period up to 31.3.2004 in orders dated 28.6.2002 and 9.4.2003 based on a capital cost of Rs. 607 crore as on 14.1.2000. By order dated 24.10.2005 the Commission allowed additional capital expenditure (R&M) of Rs. 177.47 crore up to 31.3.2004 and revised annual fixed charges.

The respondent filed Appeal No. 205/2005 to the Appellate Tribunal challenging the October 2005 order and also filed Review Petition No. 99/2006 alleging the amount allowed exceeded the amount shown in the generating station's balance sheet. Because an appeal was pending, the Commission summarily dismissed the review petition on 26.10.2006. The respondent filed Appeal No. 9/2007 against that dismissal. The Appellate Tribunal, by a common judgment dated 6.6.2007 in Appeal Nos. 205/2005 and 9/2007, allowed the appeals on certain aspects and remanded the matter to the Commission, observing that additional capitalization should be restricted to the extent reflected in the balance sheet subject to prudence check.

The respondent filed Civil Appeal Nos. 5361-5362 of 2007 to the Supreme Court under Section 125 of the Electricity Act, 2003 against the 6.6.2007 judgment; the matter was pending. The petitioner filed Civil Appeal No. 2875/2007 to the Supreme Court as well.

Following the Appellate Tribunal observations, the Commission issued an order dated 9.4.2008 determining additional capital expenditure as Rs. 173.83 crore for 14.1.2000 to 31.3.2004 but considered a reduced capital cost of Rs. 574.36 crore as on 14.1.2000 after accounting for a Rs. 32.71 crore amount reported as kept in inventories (spares). The petitioner filed Appeal No. 103/2008 to the Appellate Tribunal challenging the 9.4.2008 order. The Appellate Tribunal, by judgment dated 26.3.2009 in Appeal No. 103/2008, allowed the petitioner's challenge on the point of gross capital and directed that the Commission's reduction of the gross capital by Rs. 32.71 crore (spares) was not justified.

The present order issues pursuant to the Appellate Tribunal judgment dated 26.3.2009 in Appeal No. 103/2008 and implements that judgment subject to the outcome of the appeals pending before the Supreme Court.

Legal Issues Presented

  1. Whether the capital cost of the generating station as on 14.1.2000 should be reduced from Rs. 607 crore to Rs. 574.36 crore by excluding Rs. 32.71 crore shown as spares in inventories.
  2. Whether the notional interest rate on loan should be reduced from 14.5% (the rate at which NTPC was paying to the Government of India).
  3. Whether the amount de-capitalised should be increased by including the cost of service rendered for establishing fixed assets (i.e., treatment of de-capitalisation amounts).

Arguments of the Parties

Appellant's (Petitioner’s) Arguments

  • Challenged reduction in the capital cost of the generating station from Rs. 607 crore to Rs. 574.36 crore as on 14.1.2000 (i.e., opposed exclusion of Rs. 32.71 crore as spares from gross capital).
  • Challenged reduction in the interest rate on the notional loan from 14.5% (the rate NTPC paid to Government of India).
  • Challenged the increase in the de-capitalised amount by inclusion of the cost of services rendered for establishing fixed assets.

Respondent's Arguments

  • The respondent had contended (in Appeal No. 205/2005 and Review Petition No. 99/2006) that the amount approved by the Commission for additional capitalization was more than the actual amount shown in the balance sheet of the generating station and that capitalization should be restricted to amounts reflected in audited books, subject to prudence check.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Appellate Tribunal judgment dated 6.6.2007 in Appeal Nos. 205/2005 and 9/2007 The additional capitalization must be approved based on amounts reflected in the balance sheet and the Commission was directed to restrict the amount of capitalization to the extent reflected in the audited books of accounts subject to a prudence check. The Commission re-verified records and re-determined additional capital expenditure. It initially determined additional capitalization at Rs. 173.83 crore (for 14.1.2000 to 31.3.2004) but also considered a revised capital cost of Rs. 574.36 crore after treating Rs. 32.71 crore as inventories (not capitalized).
Appellate Tribunal judgment dated 26.3.2009 in Appeal No. 103/2008 The Tribunal held that its earlier direction (6.6.2007) was to re-examine additional capitalization only, and it did not direct reduction of the gross capital of Rs. 607 crore as on 14.1.2000; reduction of gross capital by Rs. 32.71 crore (spares) was not justified. The Commission implemented this judgment by considering the capital cost as Rs. 607.07 lakh (i.e., Rs. 607.07 crore) as on 14.1.2000 and revised the capital cost and all components of annual fixed charges accordingly.

Court's Reasoning and Analysis

The Commission's reasoning proceeds from the Appellate Tribunal's two judgments and the factual record in the books of account:

  1. The Tribunal's 6.6.2007 judgment emphasised that additional capitalization should generally be limited to amounts shown in the audited balance sheet subject to a prudence check. On re-verification, the Commission observed a discrepancy between the gross block in the balance sheet and the capital cost earlier used to determine fixed charges. The petitioner had explained that while the generating station was transferred at Rs. 1000 crore, the gross block in the books showed Rs. 967.29 crore and Rs. 32.71 crore was carried in inventories as spares. The Commission recounted that earlier (order dated 28.6.2002) the Commission had considered actual project cost of Rs. 607 crore (on date of commercial operation) and that the petitioner undertook a revaluation and adjusted Rs. 393 crore in the gross block in 2002-03.
  2. On that basis, the Commission initially excluded Rs. 32.71 crore (kept in inventories) from capitalization when implementing the 6.6.2007 direction, thereby arriving at a capital cost of Rs. 574.36 crore as on 14.1.2000 while allowing additional capital expenditure of Rs. 173.83 crore for 14.1.2000 to 31.3.2004 (order dated 9.4.2008).
  3. The petitioner challenged that exclusion in Appeal No. 103/2008. The Appellate Tribunal, by its judgment dated 26.3.2009, clarified that its earlier direction did not warrant reduction of the gross capital of Rs. 607 crore and that the Commission's reduction by Rs. 32.71 crore lacked justification. The Tribunal therefore allowed the petitioner's point on gross capital.
  4. Pursuant to the Tribunal's 26.3.2009 judgment, the Commission took the capital cost as Rs. 607.07 lakh (i.e., Rs. 607.07 crore) as on 14.1.2000 and revised the capital cost for tariff purposes after adding the additional capital expenditure allowed for the period up to 31.3.2004. The Commission then recalculated each element of the annual fixed charges (debt-equity ratio, return on equity, interest on loan, depreciation, advance against depreciation, interest on working capital and O&M) by applying the methodology and rates (as set out in the order) in light of the revised capital cost.
  5. Specific elements recalculated by the Commission in implementation of the Tribunal's direction included:
    • Adoption of a debt-equity ratio of 70:30.
    • Return on equity computed at 16% on normative equity (with detailed opening, additions and averages stated in the order).
    • Interest on loan re-calculated per the methodology adopted in the 9.4.2008 order, with year-by-year loan balances, repayments and applicable interest rates explicitly tabulated.
    • Depreciation re-calculated applying retained depreciation rates (7.84% for 1999-2000 & 2000-2001; 3.60% for 2001-2002 to 2003-2004) to the revised gross block figures.
    • Advance Against Depreciation (AAD) and interest on working capital recalculated using the revised component values and previously used operational parameters and SBI PLR for working capital rate.
  6. As a result of these recomputations, the Commission provided revised annual fixed charges for each year in 1999-2000 through 2003-2004 and implemented the Appellate Tribunal judgment dated 26.3.2009, subject to the final outcome of Civil Appeal Nos. 5361-5362/2007 and other appeals pending before the Supreme Court.

Holding and Implications

Holding: The Commission implemented the Appellate Tribunal's judgment dated 26.3.2009 in Appeal No. 103/2008 by treating the capital cost of the generating station as Rs. 607.07 lakh (Rs. 607.07 crore) as on 14.1.2000 and revising the additional capitalisation and all elements of the annual fixed charges accordingly. This implementation is subject to the final outcome of the Civil Appeal Nos. 5361-5362/2007 and other appeals pending before the Hon'ble Supreme Court of India.

Implications:

  • The capital cost and detailed tariff components (depreciation, interest on loan, return on equity, advance against depreciation, interest on working capital, O&M expenses) have been recalculated and revised figures are recorded in the order for the years 1999-2000 through 2003-2004.
  • The petitioner, already billing the respondent in accordance with the Commission's order dated 9.4.2008, shall recover the excess amount attributable to the revised annual fixed charges within a period of three months from the date of this order.
  • No broader policy or new precedent beyond implementation of the Appellate Tribunal's directions is articulated in the opinion; the order expressly records that implementation is subject to pending appeals before the Supreme Court.

This summary is based exclusively on and limited to the information contained in the provided opinion.

Show full summary ...

    National Thermal Power Corporation Ltd. v. Uttar Pradesh Power Corporation Ltd.

    This order issues pursuant to the judgment of the Appellate Tribunal for Electricity (the Appellate Tribunal) dated 26.3.2009 in Appeal No. 103/2008.

    Background of the Case

    2. Tanda TPS (hereinafter referred to as “the generating station”) was transferred by UPSEB (predecessor of the petitioner) on 14.1.2000 under the UP Electricity Reforms (Transfer of Tanda Undertaking) Scheme, 2000 for a total consideration of Rs. 1000 crore. The petitioner and UPSEB also entered into a Power Purchase Agreement dated 7.1.2000 valid for a period of 25 years from the date of vesting (14.1.2000) of the generating station in the petitioner company according to which the power generated would be supplied exclusively to UPSEB.

    3. The Commission approved the tariff for the generating station for the period up to 31.3.2004 vide order dated 28.6.2002 in Petition No. 77/2001 and order dated 9.4.2003 in Review Petition No. 2/2003 in Petition No. 77/2001. The tariff was based on the capital cost of Rs. 607 crore as on 14.1.2000

    4. Subsequently, the Commission by its order dated 24.10.2005 allowed additional capital expenditure for R&M works amounting to Rs. 177.47 crore for the period up to 31.3.2004 and revised the annual fixed charges for the said period.

    5. The respondent filed Appeal No. 205/2005 before the Appellate Tribunal against the order dated 24.10.2005 and during the pendency of the appeal, it also filed Review Petition No. 99/2006 seeking review of the said order dated 24.10.2005 on the ground that the amount approved by the Commission was more than the actual amount shown in the balance sheet of the generating station. Since the respondent had already filed appeal before the Appellate Tribunal, the review petition was summarily dismissed vide Commission's order dated 26.10.2006 The respondent filed another appeal, Appeal No. 9/2007 against the order dated 26.10.2006 and the Appellate Tribunal by its common judgment dated 6.6.2007 in Appeal Nos. 205/2005 and 9/2007 allowed the appeals on certain aspects and remanded the matter to the Commission for a fresh decision. The Appellate Tribunal in paragraphs 31 and 32 of the judgment dated 6.6.2007 observed as under:

    “31. The Appellant submitted that the additional capital expenditure is to be approved based on the balance sheet and the respondent has been allowed expenditure of those items appearing in the balance sheet. In the instant case before us, the Petition was decided by the Central Commission when the audited balance sheet was available. Thus, the amount of capitalisation as reflected in the books of accounts of the respondent ought to have been taken into consideration.

    32. We accept the plea of the Appellant on this count and direct the Central Commission to re-look into the matter and restrict the amount of capitalisation to the extent reflected in the balance sheet subject to its prudence check.”

    6. The respondent also filed Civil Appeal Nos. 5361-5362 of 2007 before the Hon'ble Supreme Court of India under Section 125 of the Electricity Act, 2003 against the judgment dated 6.6.2007 and the matter is pending. Meanwhile, the petitioner also filed Civil Appeal No. 2875/2007 before the Hon'ble Supreme Court. The Commission sought to implement the judgment of the Appellate Tribunal dated 6.6.2007, subject to the final outcome of the appeals before the Hon'ble Supreme Court.

    7. In terms of the observations of the Appellate Tribunal in the judgment dated 6.6.2007, the Commission by its order dated 9.4.2008 determined the additional capital expenditure of the generating station as Rs. 173.83 crore for the period from 14.1.2000 to 31.3.2004 The Commission however, considered the capital cost of Rs. 574.36 crore, as on 14.1.2000, based on the following considerations, namely—

    “18. On re-verification of records, it was noticed that the gross block shown in the balance sheet was different from the capital cost on which revised fixed charges were determined in the said order dated 24.10.2005 The petitioner was directed to explain the difference between the gross block in the books of accounts and the capital cost on the basis of which revised fixed charges were claimed. The petitioner has explained that the generating station was transferred to it by the Government of Uttar Pradesh at the price of Rs. 1000 crore. At the time of transfer, gross block in the books of account was shown as Rs. 967.29 crore and the balance amount of Rs. 32.71 crore was kept in the inventories as spares. It has been further submitted that while approving the tariff for the period up to 31.03.2004 prior to additional capitulation, the Commission in its order dated 28.06.2002 in Petition No. 77/2001 considered the actual project cost of Rs. 607 crore, on the date of commercial operation, as against the claim of the petitioner project cost of for Rs. 1000 crore. Consequently, the petitioner got the revaluation of assets done in accordance with certain observations of the Commission in the said order and adjusted an amount of Rs. 393 crore in the gross block during the year 2002-2003.

    19. Since an amount of Rs. 32.71 crore was kept in the inventories by the petitioner without reflecting the same in the balance sheet, the said amount has not been considered for capitalization in view of the observation of the Tribunal extracted above.”

    8. The fixed charges approved by the Commission by order dated 9.4.2008 are as under:

    (Rs. in lakh)

    Particulars 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 Depreciation 4503 4503 2298 2490 2646 Interest on Loan 5538 5162 3454 3425 3102 Return on Equity 2757 2855 3064 3320 3528 Advance Against Depreciation 0 0 1290 1369 1564 Interest on Working Capital 1198 1065 1110 1307 1468 O & M Expenses 3381 3720 3944 4181 4431 Total 17377 17305 15161 16092 16739

    9. The petitioner filed Appeal No. 103/2008 before the Appellate Tribunal challenging the order dated 9.4.2008 and raised the following issues:

    (a) Reduction in the capital cost of the generating station from Rs. 607 crore to Rs. 574.36 crore, as on 14.1.2000;

    (b) Reduction in the interest rate on notional loan from 14.5% at which rate NTPC was paying to the Govt. of India; and

    (c) Increase in the de-capitalised amount by including the cost of service rendered for establishing fixed assets.

    10. By its judgment dated 26.3.2009, the Appellate Tribunal rejected the prayer of the petitioner as regards issues at (b) and (c) above. As regards issue at (a) above, the prayer of the petitioner was allowed and the observations of the Appellate Tribunal are as under:

    “24. We observe that in the order dated 6.6.2007, this Tribunal while examining the issue at Paras 31,32 and 36 discussed the expenditure incurred on additional capitalization. These paragraphs if read with the grievance framed as indicated above would make it transparently clear that the Central Commission was directed to only relook the additional capitalization of Rs. 177.47 crore and not the gross capital of Rs. 607 crore as on 14.1.2000

    25. In view of the above, the impugned order of the Central Commission to that extent is liable to be set aside as it has reduced the gross capital assets of Rs. 607 crore by the cost of spares of Rs. 32.71 crore without any justification.”

    11. Considering the capital cost of Rs. 60707 lakh for the generating station as on 14.1.2000 in terms of the judgment of the Appellate Tribunal dated 26.3.2009, and the additional capital expenditure allowed for the period up to 31.3.2004 the capital cost of the generating station for the purpose of tariff has been revised as under:

    (Rs. in lakh)

    Particulars 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 Opening Gross Block 60707 60707 64788 69423 75447 De-capitalization 0 87 41 16 13 Additional Capitalisation 0 4188 4690 6134 2679 Additional Capital Expenditure amount not considered without corresponding de-capitalisation 0 21 13 94 23 Additional Capital Expenditure allowed for the purpose of tariff 0 4167 4677 6039 2656 Closing Gross Block 60707 64788 69423 75447 78090

    12. Revision of capital cost as above has necessitated the revision of the elements of fixed charges which are discussed in the subsequent paragraphs.

    Debt-Equity ratio

    13. The debt-equity ratio of 70:30 has been adopted in the present order, as considered earlier.

    Return on Equity

    14. Return on equity has been worked out @ 16% on the normative equity worked out by applying the debt-equity ratio of 70:30. Return on equity has been worked out as under:

    (Rs. in lakh)

    Particulars 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 Opening Balance 18212.10 18212.10 19436.33 20826.87 22633.95 Addition due to Additional capital expenditure after adjusting de-capitalisation 0.00 1224.23 1390.54 1807.08 792.92 Closing Balance 18212.10 19436.33 20826.87 22633.95 23426.88 Average 18212.10 18824.22 20131.60 21730.41 23030.42 Rate of Return on Equity 16.00% 16.00% 16.00% 16.00% 16.00% Return on Equity 2914 3012 3221 3477 3685

    Interest on Loan

    15. The interest on loan has been re-calculated as per the methodology adopted in order dated 9.4.2008 The interest on loan has been re-calculated as under:

    (Rs. in lakh)

    Particulars 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 Gross loan 42494.90 42494.90 45351.44 48596.04 52812.56 Cumulative repayments of loans upto previous year 0.00 4249 8499 12748 16998 Net loan-Opening 42494.90 38245.41 36852.46 35847.57 35814.60 Addition due to Additional Capital Expenditure 0.00 2856.54 3244.60 4216.52 1850.16 Total 42494.90 41101.95 40097.06 40064.09 37664.75 Repayment-Notional Loan component 4249 4249 4249 4249 4249 Repayment based on actual loan component 0 0 0 0 1627 Total repayment considered for the purpose of tariff 4249 4249 4249 4249 5876 Closing Balance 38245.41 36852.46 35847.57 35814.60 31788.73 Average Loan 40370.16 37548.93 36350.01 35831.08 33801.66 Rate of Interest 14.50% 14.50% 9.97% 9.97% 9.30% Interest on Loan 5854 5445 3625 3574 3143

    Depreciation

    16. Since the gross block has been modified based on the judgment of the Appellate Tribunal, it necessitates corresponding re-calculation of depreciation admissible in tariff. The rates of depreciation have been retained at 7.84% for the period 1999-2000 and 2000-2001 and 3.60% for the period 2001-2002 to 2003-2004 as adopted in the earlier orders. The details of calculation of depreciation are as under:

    (Rs. in lakh)

    Particulars 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 Opening Gross Block 60707 60707 64788 69423 75447 De-capitalization 0 87 41 16 13 Additional Capitalisation 0 4188 4690 6134 2679 Additional Capital Expenditure amount not considered without corresponding de-capitalisation 0 21 13 94 23 Additional Capital Expenditure allowed for the purpose of tariff 0 4167 4677 6039 2656 Closing Gross Block 60707 64788 69423 75447 78090 Rate of Depreciation 7.84% 7.84% 3.60% 3.60% 3.60% Annual Depreciation 4759 4759 2416 2608 2764

    Advance Against Depreciation

    17. The petitioner is not entitled to Advance Against Depreciation (AAD) for the period up to 31.3.2001 since there was provision in that regard. Advance Against Depreciation for the subsequent years, that is, 2001-2002, 2002-2003 and 2003-2004 has been worked out by taking 1/12th of the gross notional loan and repayment of loan as per the normative debt repayment methodology. The petitioner is entitled to following Advance Against Depreciation:

    (Rs. in lakh)

    Particulars 2001-2002 2002-2003 2003-2004 1/12th of Loan(s) 3779 4050 4401 Scheduled Repayment of the Loan(s) 4249 4249 5876 Minimum of Column 3779 4050 4401 Depreciation during the year 2416 2608 2764 Advance against Depreciation 1363 1442 1637

    Interest on Working Capital

    18. Revision of different components of tariff has resulted in revision of interest on working capital as they are components of “receivables” in the working capital. The operational parameters such as Target PLF/Availability, Specific fuel oil consumption, Auxiliary Power Consumption and Station Heat Rate considered in the present calculation are the same as considered in the earlier orders. Similarly, SBI PLR for the relevant year has been adopted as the rate of interest on working capital in the calculation. Accordingly, interest on working capital has been recalculated as under:

    (Rs. in lakh)

    1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 Fuel cost-1 month 1505 1324 1510 1903 2233 Coal Stock-30 days 1275 1125 1315 1732 2095 Oil stock -60 days 411 363 348 290 203 O & M expenses-1 Month 282 310 329 348 369 Spares 607 607 607 607 607 Receivables 6030 5651 5635 6572 7322 Total Working Capital 10109 9380 9744 11452 12830 Rate of Interest 12.00% 11.50% 11.50% 11.50% 11.50% Total Interest on Working capital 1213 1079 1121 1317 1475

    19. The annual fixed charges revised on the basis of the above in respect of the generating station for the period 2000-04 are summarized as under:

    (Rs. in lakh)

    Particulars 1999-2000* 2000-2001 2001-2002 2002-2003 2003-2004 Depreciation 4759 4759 2416 2608 2764 Interest on Loan 5854 5445 3625 3574 3143 Return on Equity 2914 3012 3221 3477 3685 Advance Against Depreciation 0 0 1363 1442 1637 Interest on Working Capital 1213 1079 1121 1317 1475 O & M Expenses 3381 3720 3944 4181 4431 Total 18121 18015 15690 16598 17136

    20. With the above order, the judgment dated 26.3.2009 of the Appellate Tribunal in Appeal No. 103/2008 stands implemented and is subject to the final outcome of the Civil Appeal Nos. 5361-5362/2007 and other appeals pertaining to the generating station pending before the Hon'ble Supreme Court of India.

    21. The petitioner is already billing the respondent in accordance with the Commission's order dated 9.4.2008 The excess amount on account of the revised annual fixed charges approved above shall be recovered by the petitioner within a period of three months from the date of this order.

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    Comments

    National Thermal Power Corporation Ltd. v. Uttar Pradesh Power Corporation Ltd.
    (Jul 1, 2009)