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Power Grid Corporation Of India Limited v. Kerala State Electricity Board

Central Electricity Regulatory Commission
Dec 8, 2010
Judgment
Subsequent
References
CaseIQ
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CITATION CODES
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CASE NO.

Petition No. 119/2010

Attorney(S)

1 Shri U.K Tyagi, PGCIL

2 Shri M.M Mondal, PGCIL

3 Shri R.K Gupta, PGCIL

4 Shri S.S Raju, PGCIL

JUDGES

Pramod Deo

Chairperson

S. Jayaraman, Member

V.S Verma, Member

M. Deena Dayalan, Member

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Factual and Procedural Background

The petitioner filed Petition No. 119/2010 seeking approval of tariff for combined transmission assets — a 315 MVA 400/220 kV auto-transformer at Hyderabad and a 50 MVAR reactor at Cuddapah — under Central Transmission Project (CTP) augmentation in the Southern Region for the period 1.4.2009 to 31.3.2014, under the Central Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations, 2009 (the "2009 regulations"). The petition included specific prayers such as invoking Regulation 44 for relaxation regarding grossing up of the base rate (in view of revised MAT rates in Finance Acts 2009 and 2010), allowing full depreciation recovery, reimbursement of petition filing fee and publication costs, adjustment for floating interest rates, separate billing of service tax (if applicable), and reimbursement of licence fee.

The Board of Directors of the petitioner had earlier approved capital outlay for the CTP augmentation in 1994. The notional date of commercial operation of the combined assets is recorded as 1.4.1997. Annual transmission charges for earlier periods had been determined by Commission orders dated 3.5.2006 (Petition No.129/2004) and revised by order dated 17.3.2008 implementing a judgment of the Appellate Tribunal for Electricity.

Tamil Nadu Electricity Board (TNEB) filed a reply objecting to various claims. The petition was considered by the Commission and the order determines tariff in accordance with the 2009 regulations, addresses specific items such as capital cost, debt-equity ratio, return on equity, interest on loan, depreciation, O&M, working capital, filing fee reimbursement, service tax, and related matters. The order concludes by disposing of Petition No. 119/2010.

Legal Issues Presented

  1. Whether the tariff for the combined transmission assets for 1.4.2009–31.3.2014 should be approved under the 2009 regulations and on what monetary basis (capital cost, debt-equity, ROE, depreciation, interest, O&M, working capital)?
  2. Whether Regulation 44 should be invoked to relax Regulation 15(3) so that grossing up of the base rate of return (ROE) is done using revised MAT rates as per Finance Act, 2009 and Finance Act, 2010 for relevant years (and consequential impact on tariff for 2009–14)?
  3. Whether assets combined to calculate transmission charges should be allowed to recover full depreciation (90% of gross block) over their useful life reckoned from actual COD, and whether recovery after useful life should follow the petitioner’s para 6.2 treatment?
  4. Whether the petitioner is entitled to reimbursement of petition filing fee and publication expenses?
  5. Whether adjustments for changes in interest on loan due to floating interest rates during 2009–14 should be allowed annually or only at the end of the tariff period?
  6. Whether service tax (if applicable to the petitioner for relevant years) may be billed separately to beneficiaries?
  7. Whether licence fee should be reimbursed separately from the respondents?

Arguments of the Parties

Petitioner's Arguments

  • Sought approval of tariff for combined transmission assets for 2009–14 period under the 2009 regulations and made a series of ancillary prayers (grossing up ROE using revised MAT, full depreciation recovery, reimbursement of filing fee and publication expenses, floating-rate interest adjustment, separate billing of service tax if applicable, reimbursement of licence fee).
  • Computed ROE on pre-tax basis using MAT at 11.33% (applicable for 2008–09) resulting in a grossed-up base rate of 17.481% and claimed RoE of Rs. 121.34 lakh each year on equity base of Rs. 694.10 lakh.
  • Pointed to changes in MAT rates in Finance Act, 2009 (MAT revised from 10% to 15%) and Finance Act, 2010 (MAT 18% including surcharge changes), and filed Petition No. 38/2010 seeking amendment to the 2009 regulations to allow grossing up by applicable tax for each relevant year; noted that Petition No. 38/2010 was disposed by the Commission on 3.8.2010 with directions to amend the regulations.
  • Regarding service tax, noted that Finance Act 2010 exempted transmission service from service tax but submitted that service tax implications, if any, for 2009–2010 should be shared by beneficiaries; also stated that if the exemption is later withdrawn beneficiaries would have to share any service tax paid by the petitioner.
  • Requested annual adjustment for changes in interest due to floating rates, pointing to prior practice in tariff period 2004–09 where direct settlement with beneficiaries for changes in interest due to floating rate was allowed.
  • On O&M, asserted that per ckt. km and per bay O&M rates were based on 2004 regulations and that wage revision impacts may require future approach to the Commission for additional manpower costs; reserved right to seek revision if wage impact >50%.
  • Argued that licence fee payments are not captured in historical O&M base used to compute normative O&M and therefore licence fee should be reimbursed separately.

Tamil Nadu Electricity Board (TNEB)'s Arguments

  • Submitted that any reimbursement relating to change in income tax rates during 2009–14, if to be made, should be allowed at the end of the tariff period; noted differences in collection/repayment timing and argued there is no provision in the 2009 regulations for reimbursement on account of change in MAT/Corporate tax and therefore pre-tax return on equity should be allowed in line with 2009 regulations.
  • Stated that the petitioner’s service tax claim should be governed by the outcome of Petition No. 62/2009 and, without prejudice, that outcome should be applied here to negate the claim for reimbursement of service tax.
  • Contended that the 2009 regulations do not provide for direct/annual adjustment of change in interest on loan due to floating rates and sought adjustment only, if any, at the end of the tariff period.
  • Challenged revisiting of normative O&M charges; argued O&M for 2009–14 was ordered on normative basis and the 2009 regulations do not permit revisiting normative O&M rates; sought a cap on O&M expenses and negation of claims to revise for wage revision.
  • Argued against reimbursement of licence fee as the 2009 regulations do not provide for it.
  • Sought negation of filing fee claim in line with a Commission decision dated 11.9.2008 in Petition No.129/2005 (Suo motu).
  • Requested that the petitioner bear publication expenditure and to advertise one consolidated notice for all assets declared in commercial operation as on 1.4.2009 and separate notices for assets commissioned after that date.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Order of the Appellate Tribunal for Electricity dated 16.5.2007 in Appeal No. 121 of 2005 Judicial direction that resulted in revision of earlier annual transmission charges for the transmission system. The Commission implemented that judgment and revised earlier approved annual transmission charges by its order dated 17.3.2008; the earlier tariff history for the asset reflects that implementation.
CERC order dated 3.5.2006 in Petition No. 129/2004 Admission of project cost and earlier tariff determination prior to the 2009 regulations. The admitted project cost from this order (and subsequent related order) formed the basis for capital cost for tariff determination under the 2009 regulations (gross block Rs. 1605.91 lakh).
CERC order dated 17.3.2008 (implementation of APTEL judgment) Revision of tariffs as a consequence of the Appellate Tribunal's judgment. The order is referenced as having revised the earlier charges and is used as a basis for admitted costs and historical data used in the present tariff computation.
CERC order dated 3.8.2010 in Petition No. 17/2010 Decision to amend the 2009 regulations to allow grossing up of the base rate of return with the applicable tax rate as per the Finance Act for the relevant year and for direct settlement of tax liability between licensee and beneficiaries on year-to-year basis. The Commission noted that this decision will address the petitioner's grievance regarding MAT rate and that the amendment process is underway; this is acknowledged in the order when dealing with ROE/MAT issue.
CERC order dated 11.1.2010 in Petition No. 109/2009 Decision allowing recovery of filing fee by petitioner from beneficiaries in similar circumstances. The Commission applied that decision and allowed the petitioner to recover the filing fee and publication expenses from beneficiaries on a pro rata basis.
CERC order dated 11.9.2008 in Petition No. 129/2005 (Suo motu) Commission decision referenced by TNEB regarding filing fee practice. The TNEB relied on this order to argue against the filing fee claim; the Commission, however, relied on its later order of 11.1.2010 in Petition No.109/2009 to allow recovery.
Petition No. 62/2009 (pending/related) Addressing the question of reimbursement of service tax for transmission services. TNEB asked that outcome of Petition No. 62/2009 be applied; the Commission noted the connection but observed that service tax prayer in the present petition became infructuous because transmission service was exempted from service tax (Finance Act 2010).

Court's Reasoning and Analysis

The Commission considered the petition and objections and determined tariff strictly in accordance with the provisions of the 2009 regulations. The analysis proceeded item by item, applying the relevant regulatory provisions quoted in the order and performing detailed numeric computations recorded in the order.

Capital cost: Clause (2) of Regulation 7 (2009 regulations) was applied: project cost admitted by the Commission prior to 1.4.2009 forms the basis for tariff. The petitioner claimed capital expenditure of Rs. 1605.91 lakh as admitted by the Commission in earlier orders (3.5.2006 and 17.3.2008). The gross block of Rs. 1605.91 lakh as on 31.3.2009 was accordingly considered for tariff purposes.

Debt–Equity Ratio: Clause (2) of Regulation 12 (2009 regulations) requires use of the debt-equity ratio allowed for the period ending 31.3.2009 for systems declared commercial before 1.4.2009. The petitioner’s claimed ratio of 56.78:43.22 (as per the order dated 3.5.2006 and 17.3.2008) was therefore adopted.

Return on Equity (ROE): Regulation 15 (2009 regulations) prescribes a base pre-tax ROE of 15.5% grossed up by the applicable tax rate as per clause (3). The order quoted Regulation 15 fully, including the illustration that with MAT @11.33% the grossed up rate becomes 17.481%. The petitioner had computed ROE on the basis of MAT 11.33% for 2008–09 and claimed Rs. 121.34 lakh each year (17.481% on equity base of Rs. 694.10 lakh). The Commission found this to be in order and allowed ROE of Rs. 121.34 lakh each year for the tariff period. The order also noted the Commission's decision in Petition No. 17/2010 (order dated 3.8.2010) to amend the 2009 regulations to permit grossing up by the applicable Finance Act tax rate for each year, and that the amendment process was underway to address the MAT grievance.

Interest on Loan: The Commission quoted Regulation 16 and followed its methodology: normative gross loan as per Regulation 12, normative outstanding loan as on 1.4.2009 by deducting cumulative repayment admitted up to 31.3.2009, repayment for each year deemed equal to depreciation allowed, weighted average rate of interest based on actual loan portfolio applied to normative average loan to determine interest. The Commission described the calculation steps (taking data from earlier orders, applying IBRD-I amortisation schedule, considering normative loan and repayments) and provided year-wise figures for weighted average rate and interest on loan, resulting in the interest numbers shown in the order (e.g., Rs. 15.33 lakh for 2009–10, falling over the block as principal repaid).

Depreciation: Regulation 17 was applied: depreciable base = capital cost admitted; salvage value 10% (depreciation up to 90% of capital cost); straight-line method using rates in Appendix-III; for existing projects balance depreciable value as on 1.4.2009 to be worked out by deducting cumulative depreciation admitted up to 31.3.2009. Because the transmission asset had completed 12 years by 1.4.2009, the remaining depreciable value was spread over the balance useful life and depreciation for each year 2009–14 worked out at Rs. 40.30 lakh (rate 5.2243%), as demonstrated by the table in the order.

Operation & Maintenance (O&M) Expenses: The order applied Regulation 19(g) norms for 400 kV bays (per-bay values for each year 2009–14). The petitioner claimed O&M for 2 bays and the Commission allowed O&M accordingly, computing yearly O&M figures (e.g., Rs. 104.80 lakh in 2009–10, rising each year as norms prescribe). The petitioner’s reservation to approach later for wage revision impact was noted; the Commission recorded that decisions on wage hike reimbursement and licence fee reimbursement would be taken in other petitions and applied to the present case when taken.

Interest on Working Capital: Regulation 18 components were applied: receivables equivalent to two months' average billing (at target availability); maintenance spares @15% of O&M; one month O&M; rate of interest on working capital = SBI PLR as on 1.4.2009 (12.25%). The computations were appended and interest on working capital was allowed based on these norms (e.g., Rs. 8.93 lakh for 2009–10).

Transmission Charges: The order aggregated allowed components (depreciation, interest on loan, ROE, interest on working capital, O&M) and presented the annual totals for 2009–14. The totals per year were set out in the order's table and formed the basis for monthly billing to beneficiaries pursuant to Regulation 23 and allocation under Regulation 33 of the 2009 regulations.

Filing Fee and Publication Expenses: The petitioner sought reimbursement of petition filing fee and publication costs. The Commission referred to its decision in Petition No. 109/2009 (order dated 11.1.2010) and allowed recovery of filing fee and publication expenses from beneficiaries on a pro rata basis.

Service Tax: The petitioner sought reimbursement of service tax; the Commission observed that transmission service had been exempted from service tax by Finance Act 2010, rendering the prayer infructuous for the relevant period. The Commission therefore did not allow separate recovery for service tax as a live claim.

Other Issues: The petitioner’s claim for licence fee reimbursement was recorded; the Commission stated that decision on licence fee reimbursement would be intimated in due course (i.e., left open pending broader decisions). The Commission also recorded TNEB's objections on revisiting normative O&M, floating-rate interest adjustments, and other procedural matters and applied the 2009 regulations as the governing framework.

Holding and Implications

Core Ruling: The Commission allowed tariff for the combined transmission assets for the period 1.4.2009–31.3.2014 in accordance with the 2009 regulations, adopting the admitted capital cost (gross block Rs. 1605.91 lakh), earlier admitted debt–equity ratio (56.78:43.22), allowing ROE as computed on MAT @11.33% resulting in Rs. 121.34 lakh per year, permitting interest on loan and working capital and O&M as computed under the regulations, and permitting recovery of filing fee and publication expenses from beneficiaries. The order records that Petition No. 119/2010 is disposed of. (See: "This order disposes of Petition No. 119/2010.")

Implications:

  • The direct effect is that the petitioner is entitled to recover the transmission charges as set out annually in the order, billed monthly under Regulation 23 and shared by respondents under Regulation 33 for 2009–14.
  • The petitioner may recover filing fee and publication expenses from beneficiaries on a pro rata basis in accordance with the Commission's earlier decision cited (11.1.2010 in Petition No.109/2009).
  • The petitioner's request for service tax recovery became infructuous due to the exemption of transmission services from service tax under Finance Act 2010; no separate recovery for service tax was allowed in this order.
  • The Commission acknowledged petitioner’s grievance regarding MAT rates and noted that a separate process (amendment of the 2009 regulations following the order dated 3.8.2010 in Petition No.17/2010) was underway to permit grossing up by applicable yearly tax rates and direct settlement of tax liability on a year-to-year basis; this indicates a procedural avenue for addressing tax-rate changes but the present order applied the 2009 regulations as they stood.
  • No broadly new legal doctrine was created by this order; the Commission applied existing provisions of the 2009 regulations and relevant prior orders/decisions to the facts and computations of this petition. Specific unresolved items (e.g., licence fee reimbursement and broader O&M wage-revision consequences) were left to be decided in other proceedings and to be applied to this case when determined.

Disposition: THIS ORDER DISPOSES OF PETITION NO. 119/2010.

Show all summary ...

The petition has been filed seeking approval of tariff for combined elements of (i) 315 MVA 400/220 kV Auto transformer at Hyderabad, and (ii) 50 MVAR Reactor at Cuddapah (hereinafter referred to as “the transmission assets”) under CTP augmentation in Southern Region for the period 1.4.2009 to 31.3.201, based on the Central Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations, 2009 (hereinafter referred to as “the 2009 regulations”). The petitioner has made the following additional prayers:—

(a) To invoke the provision of Regulation 44 of the 2009 regulations for relaxation of regulations 15(3) of the 2009 regulations so that grossing up the base rate shall be considering the revised rate of MAT as per the Finance Act, 2009 for the year 2009-2010 and as per the Finance Act, 2010 for the year 2010-2011 and subsequent years and allow consequential impact on tariff for 2009-14 period accordingly;

(b) In case of assets being combined to calculate the transmission charges, allow to it to recover full depreciation (90% of the gross block) of the assets during its useful life (25 years for sub-station and 35 years for transmission lines) reckoning from its actual date of commercial operation and to permit to treat the recovery of depreciation after achieving the useful life by an asset (to be reckoned from the actual date of commercial operation) in accordance with para 6.2 of the petition;

(c) To approve reimbursement of petition filing fee and publication of notices in the newspaper as per the 2009 regulations;

(d) Allow to adjust impact on interest on loan due to floating rate of interest applicable during 2009-14;

(e) Allow to bill and recover the service tax on transmission charges separately from the respondents, if the petitioner is subjected to such service tax; and

(f) Allow reimbursement of licence fee separately from the respondents;

2. The Board of Directors of the petitioner company in its meeting held on 18.3.1994 accorded the approval for Central Transmission Project augmentation, under its delegated power for capital outlay of Rs. 3857.00 lakh, including IDC of Rs. 350.00 lakh for the transmission assets. The notional date of commercial operation of the combined assets is 1.4.1997

3. The annual transmission charges for the period 1.4.2009 to 31.3.2009 in respect of the transmission system were initially approved by the Commission vide order dated 3.5.2006 in Petition No. 129/2004. The same were subsequently revised vide order dated 17.3.2008 by way of implementation of the judgment of the Hon'ble Appellate Tribunal for Electricity dated 16.5.2007 in Appeal No. 121 of 2005.

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

(Rs. in lakh)

2009-2010 2010-2011 2011-2012 2012-2013 2013-2014 Depreciation 40.30 40.30 40.30 40.30 40.30 Interest on Loan 15.33 11.96 8.60 5.24 1.88 Return on Equity 121.34 121.34 121.34 121.34 121.34 Interest on Working Capital 8.93 9.16 9.41 9.67 9.96 O&M Expenses 104.80 110.80 117.14 123.84 130.92 Total 290.70 293.56 296.79 300.39 304.40

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

(Rs. in lakh)

2009-2010 2010-2011 2011-2012 2012-2013 2013-2014 Maintenance Spares 15.72 16.62 17.57 18.58 19.64 O&M expenses 8.73 9.23 9.76 10.32 10.91 Receivables 48.45 48.93 49.47 50.07 50.73 Total 72.90 74.78 76.80 78.97 81.28 Rate of Interest 12.25% 12.25% 12.25% 12.25% 12.25% Interest 8.93 9.16 9.41 9.67 9.96

6. Reply to the petition has been filed by Tamil Nadu Electricity Board (TNEB). No comments or suggestions have been received from the general public in response to the notices published by the petitioner under section 64 of the Electricity Act, 2003.

7. TNEB in its reply has made following submission:

(i) Allow reimbursement of impact on tariff on account of change in income tax rates during the tariff period 2009-14, if any at the end of tariff period. In the earlier tariff period, the income tax was reimbursed at the end of year whereas the present tariff period 2009-14 provide for collection of ROE including grossed up tax on a monthly basis. Whereas the actual repayment of advance income tax by the petitioner in on an quarterly basis. To this extent there is upfront payment by the beneficiaries. As such there is no provision in the 2009 regulations for reimbursement on account of change in the rate of MAT/Corporate tax, therefore, allow pre-tax return on equity in line with the provisions of the 2009 regulations;

(iii) Under para 6.5 of the petition, the petitioner has prayed that the service tax payable by them be allowed to be recovered from the beneficiaries. As the petition No. 62/2009 pertaining to the issue is to be disposed of by the Commission, therefore, without prejudice to our rights available, the outcome of the said petition be made applicable in this case also and negate the claim for reimbursement of service tax;

(iv) Under the 2009 regulation, there is no specific provision in regard to floating rate of interest to be claimed/adjusted over the tariff block of 5 years directly from the beneficiaries. It has been prayed to allow adjustment of billing on impact of interest on loan component on account of change in floating rate of interest, if any at the end of tariff period;

(iv) To negate the claim of O & M expenses as the O & M expenses for the tariff period 2009-14 had been ordered on a normative basis and the 2009 regulations also do not provide for revisiting the normative O & M charges viz Rs. lakh/km and Rs. lakh/bay already fixed on the tariff period. TNEB has requested to fix a cap for the O & M expenses;

(v) To negate the claim for reimbursement of license fee as the 2009 regulations does not make any provisions for reimbursement of licence fee;

(iv) To negate the filing fee claim in line with the decision taken by the Commission vide its order dated 11.9.2008 in Petition No. 129/2005 (Suo motu);

(v) To negate the request for revision of the normative O & M expenses considering the impact of wage revision, effective from 1.1.2007 as the regulations does not provide any revision under any circumstances;

(vi) To direct the petitioner to bear the publication expenditure and to advertise the one stretch for all the assets declared for commercial operation as on 1.4.2009 and separate notices for assets commissioned after 1.4.2009

8. The petitioner vide its rejoinder dated 11.6.2010 has made following submission:

(i) In regard to MAT, the petitioner has submitted that ROE has been calculated @ 17.481% based on the 2009 regulations and the rate of 17.481% is based on the MAT rate of 11.33% being applicable for the year 2008-2009. As per the Finance Act, 2009, the applicable MAT rate was revised from 10% to 15% and as per the Finance Act, 2010, MAT has been revised to 18%, including surcharge from 7.5% to 10%. In view of the substantial change in the MAT rate and therein impact on the cash flow, a Petition No. 38/2010 has been filed which was disposed by the Commission vide its order dated 3.8.2010 with direction to amend the 2009 regulations for allowing grossing up of the base rate of return with the applicable tax rate as per the Finance Act for the relevant year and for direct settlement of tax liability of between the generating company/transmission licensee and the beneficiaries/long term transmission customers on year to year basis;

(ii) In regard to service tax, the petitioner has submitted that in the Finance Act 2010, transmission service has been exempted from service tax. However, service tax implication, if any, for the period 2009-2010 shall have to be shared by the beneficiaries. Further, in case the said notification regarding granting of exemption to transmission service from service tax is withdrawn on later date, the beneficiaries shall have to share the serviced tax paid by the petitioner;

(iii) In regard to floating rate of interest, the petitioner has submitted that the Commission allowed direct settlement with the beneficiaries any change in interest on account of floating rate of interest for the tariff period 2004-09. The change in interest rate may increase or decrease during the tariff period and hence it would be fair to allow annual adjustment of difference in interest rate. Hence, the petitioner has prayed to follow the same practice with regard to claiming change in interest due to floating rate of interest for the period 2009-14 as was on done in 2004-09 period;

(iv) In regard to O & M, the petitioner has submitted that per ckt. km. and per bay O & M rates considered are based on the 2004 regulations. The petitioner has submitted that the wage revision for the executive levels has already been done, however, for the non-executive levels, the wage revision shall be done shortly and he will approach before the Commission for additional manpower cost on account of wage revision during the period 2009-14;

(v) In regard to licence fee, the petitioner has submitted that tariff allowed covers O & M expenses during the operation phase of the project. The rates for O & M have been worked out based on the past 5 year actual O & M expenses. The Payment of toward licence fee is not represented in those actual O & M expenses and therefore extra cost on the petitioner. Therefore, this extra cost burden during O & M phase needs to be reimbursed.

9. We have carefully considered the objections of TENB and reply filed by the petitioner. The tariff of the transmission line has been determined in this order strictly in accordance with the provisions of 2009 regulations. As regards the reimbursement of licence fee, decision on the same will be intimated in due course. In regard to service tax, reimbursement of filing fee and publication expenditure, the same has been dealt with in relevant paras of the order.

CAPITAL COST

10. As per clause (2) of Regulation 7 of the 2009 regulations, the project cost admitted by the Commission for determination of tariff prior to 1.4.2009 shall form the basis for determination of tariff.

11. The petitioner has claimed the capital expenditure of Rs. 1605.91 lakh, which was admitted vide order dated 3.5.2006 read with order dated 17.3.2008 in Petition No. 129/2004. The petitioner has not claimed any projected additional capital expenditure.

12. Accordingly, gross block of Rs. 1605.91 lakh as on 31.3.2009 has been considered for the purpose of tariff.

DEBT- EQUITY RATIO

13. Clause (2) of Regulation 12 of the 2009 regulations inter alia provides that,—

“(2) In case of the generating station and the transmission system declared under commercial operation prior to 1.4.2009, debt-equity ratio allowed by the Commission for determination of tariff for the period ending 31.3.2009 shall be considered.”

14. The petitioner has claimed tariff based on debt-equity ratio of 56.78:43.22 as considered by the Commission in its order dated 3.5.2006 read with order dated 17.3.2008 ibid. The same debt-equity ratio has been considered for the purpose of tariff.

RETURN ON EQUITY

15. Regulation 15 of the 2009 regulations provides that,—

“15. (1) Return on equity shall be computed in rupee terms, on the equity base determined in accordance with regulation 12.

(2) Return on equity shall be computed on pre-tax basis at the base rate of 15.5% to be grossed up as per clause (3) of this regulation:

Provided that in case of projects commissioned on or after 1st April, 2009, an additional return of 0.5% shall be allowed if such projects are completed within the timeline specified in Appendix-II:

Provided further that the additional return of 0.5% shall not be admissible if the project is not completed within the timeline specified above for reasons whatsoever.

(3) The rate of return on equity shall be computed by grossing up the base rate with the normal tax rate for the year 2008-2009 applicable to the concerned generating company or the transmission licensee, as the case may be:

Provided that return on equity with respect to the actual tax rate applicable to the generating company or the transmission licensee, as the case may be, in line with the provisions of the relevant Finance Acts of the respective year during the tariff period shall be trued up separately for each year of the tariff period along with the tariff petition filed for the next tariff period.

(4) Rate of return on equity shall be rounded off to three decimal points and be computed as per the formula given below:

Rate of pre-tax return on equity = Base rate/(1-t)

Where it is the applicable tax rate in accordance with clause (3) of this regulation.

Illustration.—

(i) In case of the generating company or the transmission licensee paying Minimum Alternate Tax (MAT) @ 11.33% including surcharge and cess:

Rate of return on equity = 15.50/(1-0.1133) = 17.481%

(ii) In case of generating company or the transmission licensee paying normal corporate tax @ 33.99% including surcharge and cess:

Rate of return on equity = 15.50/(1-0.3399) = 23.481%.”

16. The petitioner has computed return on equity on pre-tax basis on 11.33% MAT in accordance with tax rate applicable for the year 2008-2009 and claimed return on equity of Rs. 121.34 lakh each year during the tariff period @ 17.481% against the equity base of Rs. 694.10 lakh. This has been found to be in order. Accordingly, the petitioner shall be entitled to return on equity @ Rs. 121.34 lakh each year during the tariff period, as claimed.

17. The Commission vide its order dated 3.8.2010 in Petition No. 17/2010 has already taken a decision to amend the 2009 regulations for allowing grossing up of the base rate of return with the applicable tax rate as per the Finance Act for the relevant year and for direct settlement of tax liability of between the generating company/transmission licensee and the beneficiaries/long term transmission customers on year to year basis. The process of amendment to the 2009 regulation is under way and will address the grievance of the petitioner with regard to the MAT rate.

INTEREST ON LOAN

18. Regulation 16 of the 2009 regulations provides that,—

“16. (1) The loans arrived at in the manner indicated in regulation 12 shall be considered as gross normative loan for calculation of interest on loan.

(2) The normative loan outstanding as on 1.4.2009 shall be worked out by deducting the cumulative repayment as admitted by the Commission up to 31.3.2009 from the gross normative loan.

(3) The repayment for the year of the tariff period 2009-14 shall be deemed to be equal to the depreciation allowed for that year:

(4) Notwithstanding any moratorium period availed by the generating company or the transmission licensee, as the case may be the repayment of loan shall be considered from the first year of commercial operation of the project and shall be equal to the annual depreciation allowed.

(5) The rate of interest shall be the weighted average rate of interest calculated on the basis of the actual loan portfolio at the beginning of each year applicable to the project:

Provided that if there is no actual loan for a particular year but normative loan is still outstanding, the last available weighted average rate of interest shall be considered:

Provided further that if the generating station or the transmission system, as the case may be, does not have actual loan, then the weighted average rate of interest of the generating company or the transmission licensee as a whole shall be considered.

(6) The interest on loan shall be calculated on the normative average loan of the year by applying the weighted average rate of interest.

(7) The generating company or the transmission licensee, as the case may be, shall make every effort to re-finance the loan as long as it results in net savings on interest and in that event the costs associated with such re-financing shall be borne by the beneficiaries and the net savings shall be shared between the beneficiaries and the generating company or the transmission licensee, as the case may be, in the ratio of 2:1.

(8) The changes to the terms and conditions of the loans shall be reflected from the date of such re-financing.

(9) In case of dispute, any of the parties may make an application in accordance with the Central Electricity Regulatory Commission (Conduct of Business) Regulations, 1999, as amended from time to time, including statutory re-enactment thereof for settlement of the dispute:

Provided that the beneficiary or the transmission customers shall not withhold any payment on account of the interest claimed by the generating company or the transmission licensee during the pendency of any dispute arising out of re-financing of loan.”

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

(i) Details of net outstanding loan as on 31.3.2009, cumulative repayment up to 31.3.2009 have been taken from the order dated 13.5.2006 read with order dated 17.3.2008 in Petition No. 129/2004 for working out weighted average rate of interest. Repayment of loan has been considered as per the IBRD-I amortisation schedule. Rate of interest has been taken as per the documents annexed with petition;

(ii) Tariff has been worked out considering normative loan and normative repayments. Depreciation allowed has been taken as normative repayment for the period 2009-14;

(iii) Weighted average rate of interest on actual loan worked out as above has been applied on the notional average loan during the year to arrive at the interest on loan.

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

(Rs. in Lakh)

Details of loan Up to 31.3.2009 2009-2010 2010-2011 2011-2012 2012-13 2013-14 Gross Normative Loan 911.81 911.81 911.81 911.81 911.81 911.81 Cumulative Repayment up to Previous Year 707.90 748.20 788.50 828.79 869.09 Net Loan-Opening 203.91 163.61 123.31 83.02 42.72 Addition due to Additional Capitalisation 0.00 0.00 0.00 0.00 0.00 Repayment during the year 40.30 40.30 40.30 40.30 40.30 Net Loan-Closing 163.61 123.31 83.02 42.72 2.42 Average Loan 183.76 143.46 103.17 62.87 22.57 Weighted Average Rate of Interest on Loan 8.3400% 8.3400% 8.3400% 8.3400% 8.3400% Interest 15.33 11.96 8.60 5.24 1.88

21. The detailed calculations in support of the weighted revised average rate of interest are contained in Annexure attached.

DEPRECIATION

22. Regulation 17 of the 2009 regulations provides for computation of depreciation in the following manner, namely:

“17. (1) The value base for the purpose of depreciation shall be the capital cost of the asset admitted by the Commission.

(2) The salvage value of the asset shall be considered as 10% and depreciation shall be allowed up to maximum of 90% of the capital cost of the asset.

(3) Land other than the land held under lease and the land for reservoir in case of hydro generating station shall not be a depreciable asset and its cost shall be excluded from the capital cost while computing depreciable value of the asset.

(4) Depreciation shall be calculated annually based on Straight Line Method and at rates specified in Appendix-III to these regulations for the assets of the generating station and transmission system:

Provided that, the remaining depreciable value as on 31st March of the year closing after a period of 12 years from date of commercial operation shall be spread over the balance useful life of the assets.

(5) In case of the existing projects, the balance depreciable value as on 1.4.2009 shall be worked out by deducting the cumulative depreciation as admitted by the Commission up to 31.3.2009 from the gross depreciable value of the assets.

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

23. The transmission asset will complete 12 years at the beginning of 2009-2010 and thus, depreciation during the period 2009-2010 and 2013-2014 has been calculated by spreading the remaining depreciable value over the balance useful life of the asset.

24. For the period 1.4.2009 to 31.3.2014, the depreciation works out to Rs. 40.30 lakh each year by applying rate of depreciation of 5.2243% as shown below:

(Rs. in Lakh)

Details of Depreciation Up to 31.3.2009 2009-2010 2010-2011 2011-2012 2012-13 2013-14 Gross block as per order dated 3.5.2006 read with order dated 17.3.2008 1605.90 1605.90 1605.90 1605.90 1605.90 1605.90 Addition during 2009-14 due to projected Additional Capitalisation 0.00 0.00 0.00 0.00 0.00 Gross block as on 31.3.2009 1605.90 1605.90 1605.90 1605.90 1605.90 Average gross block 1605.90 1605.90 1605.90 1605.90 1605.90 Rate of Depreciation 5.2243% 5.2243% 5.2243% 5.2243% 5.2243% Depreciable Value 90% 1445.31 1445.31 1445.31 1445.31 1445.31 Elapsed Life 12 13 14 15 16 Weighted Balance Useful life of the combine assets 13 12 11 10 9 Remaining Depreciable Value 523.87 483.57 443.27 402.98 362.68 Depreciation 40.30 40.30 40.30 40.30 40.30

OPERATION & MAINTENANCE EXPENSES

25. In accordance with clause (g) of Regulation 19 the 2009 regulations, the following norms for 400 kV bays are prescribed for O & M expenses:

Year 2009-2010 2010-2011 2011-2012 2012-2013 2013-2014 400 kV bays (Rs. in lakh/bay) 52.40 55.40 58.57 61.92 65.46

26. The petitioner has claimed O & M expenses for 2 bays, which has been allowed. Accordingly, the petitioner's entitlement to O & M expenses has been worked out as given hereunder:

(Rs. in lakh)

Year 2009-2010 2010-2011 2011-2012 2012-2013 2013-2014 400 kV bays (2 bays) 104.80 110.80 117.14 123.84 130.92 Total 104.80 110.80 117.14 123.84 130.92

27. The petitioner has submitted that transmission charges claimed for the year 2009-14 is inclusive of O & M expenses for project derived based on the norms for expenditure as specified under Regulation 19(g) of the 2009 regulation. Accordingly, O & M expenses for the transmission assets have been considered as per Regulation 19(g) of the 2009 regulations. The petitioner has further submitted that he reserves the right to approach the Commission for suitable revision in the norms for O & M expenditure in case the impact of wage hike w.e.f 1.1.2007 is more then 50%. The petitioner has further submitted that O & M norms for the period 2009-14, the cost associated with license fees had not been captured and the licence fee be allowed to be recovered separately from the respondents.

28. The issues have been raised by the petitioner in other petitions also. A view is yet to be taken by the Commission on reimbursement of the cost of wage hike and reimbursement of licence fees. The decision as and when taken will be applicable to the present case also.

INTEREST ON WORKING CAPITAL

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

(i) Receivables

As per Regulation 18(1)(c)(i) of the 2009 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.

(ii) Maintenance spares

Regulation 18(1)(c)(ii) of the 2009 regulations provides for maintenance spares @ 15% per annum of the O & M expenses from 1.4.2009 The value of maintenance spares works out to Rs. 15.72 lakh as on 1.4.2009

(iii) O & M expenses

Regulation 18(1)(c)(iii) of the 2009 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.

(iv) Rate of interest on working capital

As per Regulation 18(3) of the 2009 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 1.4.2009 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 @ 12.25% based on SBI PLR as on 1.4.2009, which is in accordance with the 2009 regulations and has been allowed.

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

(Rs. in lakh)

2009-2010 2010-2011 2011-2012 2012-2013 2013-2014 Maintenance Spares 15.72 16.62 17.57 18.58 19.64 O&M expenses 8.73 9.23 9.76 10.32 10.91 Receivables 48.45 48.93 49.46 50.06 50.73 Total 72.90 74.78 76.80 78.96 81.28 Rate of Interest 12.25% 12.25% 12.25% 12.25% 12.25% Interest 8.93 9.16 9.41 9.67 9.96

TRANSMISSION CHARGES

31. The transmission charges being allowed for the transmission asset are summarised below:

(Rs. in lakh)

2009-2010 2010-2011 2011-2012 2012-2013 2013-2014 Depreciation 40.30 40.30 40.30 40.30 40.30 Interest on Loan 15.33 11.96 8.60 5.24 1.88 Return on Equity 121.34 121.34 121.34 121.34 121.34 Interest on Working Capital 8.93 9.16 9.41 9.67 9.96 O&M Expenses 104.80 110.80 117.14 123.84 130.92 Total 290.69 293.56 296.78 300.39 304.39

Application fee and the publication expenses

32. The petitioner has sought approval for the reimbursement of fee paid by it for filing the petition. In accordance with our decision in order dated 11.1.2010 in Petition No. 109/2009, the petitioner shall be entitled to recover the filing fee from the beneficiaries.

33. Accordingly, expenses incurred by the petitioner on application filing fees and publication of notices in connection with the present petition shall be directly recovered from the beneficiary on pro rata basis.

Service Tax

34. The prayer of the petitioner for reimbursement of service tax has become infructuous as transmission service has been exempted from the ambit of the service tax.

35. The transmission charges allowed shall be recovered on monthly basis in accordance with Regulation 23 and shall be shared by the respondents in accordance with Regulation 33 of the 2009 regulations.

36. This order disposes of Petition No. 119/2010.

Annexure

CALCULATION OF WEIGHTED AVERAGE RATE OF INTEREST ON LOAN

(Rs. in Lakh)

Details of Loan 2009-2010 2010-2011 2011-2012 2012-13 2013-14 1 IBRD-I (Auto Transformer) Gross loan opening 770.55 770.55 770.55 770.55 770.55 Cumulative Repayment the date of commercial operation/previous year 452.39 514.35 581.00 652.68 729.79 Net Loan-Opening 318.16 256.20 189.56 117.88 40.76 Additions during the year 0.00 0.00 0.00 0.00 0.00 Repayment during the year 61.96 66.65 71.68 77.11 40.75 Net Loan-Closing 256.20 189.56 117.88 40.76 0.01 Average Loan 287.18 222.88 153.72 79.32 20.39 Rate of Interest 8.34% 8.34% 8.34% 8.34% 8.34% Interest 23.95 18.59 12.82 6.62 1.70 Rep Schedule Total Loan Gross loan opening 770.55 770.55 770.55 770.55 770.55 Cumulative Repayment up to the date of commercial operation/previous year 452.39 514.35 581.00 652.68 729.79 Net Loan-Opening 318.16 256.20 189.56 117.88 40.76 Additions during the year 0.00 0.00 0.00 0.00 0.00 Repayment during the year 61.96 66.65 71.68 77.11 40.75 Net Loan-Closing 256.20 189.56 117.88 40.76 0.01 Average Loan 287.18 222.88 153.72 79.32 20.39 Rate of Interest 8.3400% 8.3400% 8.3400% 8.3400% 8.3400% Interest 23.95 18.59 12.82 6.62 1.70

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