LOKTAK ESTIMATE COMMITTEE

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PRESENTATION
On
Comments on Discussion paper on Terms and
conditions of tariff (Tariff period
commencing from 01.04.2004)
by
National Hydroelectric Power Corporation Ltd.
( A Govt. of India Enterprise)Sector
33, Faridabad (Haryana),
INDIA
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Presentation of NHPC
on Discussion paper on Terms
Conditions of Tariff effective from 01.04.2004

• As per the Electricity Act 2003 under Section 61,
  CERC shall be guided by the National Electricity
  Policy and Tariff Policy for the purpose of
  specifying the terms and conditions for
  determination of tariff.
• Government of India has still not finalised the
  National Electricity Policy and Tariff Policy.
• It is perhaps in this context too early to
  deliberate on the concept paper.
• In view of the above it is felt that
  existing terms and conditions should continue for
  a further period of 3 years.

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Presentation of NHPC on Discussion paper on
Terms Conditions of Tariff effective from
01.04.2004
Issues relevant to transmission and wheeling of
electricity (Para 2.3.3)

• The transmission and wheeling services should not
  be provided free.
• The methodology proposed in para 2.3.3.4 for
  sharing of transmission / wheeling charges seems
  to be reasonable.
• NHPC is of the opinion that the transmission /
  wheeling charges should be payable only by the
  importing utility and should not be shared /
  borne by the exporting utility / generator
  because of the prevailing gap between demand and
  supply.

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Presentation of NHPC on Discussion paper on
Terms Conditions of Tariff effective from
01.04.2004
Interest on Loan (Para 3.1.2.(i))

• Interest on loan should be continued to be
  provided separately on actual basis as per
  existing system.
• Besides, if short terms loans are raised to pay
  earlier term loans (if Depreciation Advance
  Against Depreciation is not enough to provide
  funds for repayment of loans), then interest
  should be paid on these short term loans also.

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Presentation of NHPC on Discussion paper on
Terms Conditions of Tariff effective from
01.04.2004
Rate of return (Para 3.2)
The rate of return should be return on equity
rather than the return on capital employed (ROCE)
for the following reasons-

• Debt equity ratio is varying and has not yet
  stabilized to the proposed preferable level of
  8020.
• Clear basis for the determining the interest on
  debt portion is not available.
• Miscellaneous provision (0.5 proposed by the
  CERC) to cover the cost of FERV, income tax, fuel
  charges etc. is on adhoc basis and not based on
  any study.

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Presentation of NHPC on Discussion paper on
Terms Conditions of Tariff effective from
01.04.2004
Contd.
Rate of return (Para 3.2)

• Foreign exchange rate variation (FERV) depends on
  many national / international issues and any
  miscellaneous provision in ROCE to take care of
  FERV will be on adhoc basis and not based on any
  study.
• PLR is changing and has not yet stabilised and
  therefore ROCE approach will need revision on
  year to year basis and keeping it fixed for
  tariff period will be incorrect.
• Abnormal variation of PLR carries the risk and
  adhoc figure of 5 variation in PLR for
  re-setting the tariff in that particular year, is
  also not reasonable / based on any study.
  

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Presentation of NHPC on Discussion paper on
Terms Conditions of Tariff effective from
01.04.2004
Contd.
Rate of return (Para 3.2)

• The return on equity is more dependant on
  mobilizing extra resources for Hydropower
  development and therefore the present concept of
  return on equity should continue.
• The rate of return in Hydro Sector should be more
  as compared to others for attracting more
  investments in this sector.
• The present system of 16 return on equity i.e.
  post tax return of 16 p.a. should at least
  continue.

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Presentation of NHPC on Discussion paper on
Terms Conditions of Tariff effective from
01.04.2004
Rate Base (Para 3.3)

• Determination of rate base in case of return on
  equity (ROE) is simple and easy and is the equity
  base whereas in case of ROCE determination of
  rate base is more complicated and cumbersome.
• Depending upon the balance sheet for the rate
  base is not appropriate due to the following
  reasons

• Capital cost is provisional and may be inclusive
  of certain provisions for payment to the
  contractors.
• Certain payments are required to be made to the
  contractor on the basis of the arbitration award
  etc. which are known only at the later date and
  are not included in the capital cost.

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Presentation of NHPC on Discussion paper on
Terms Conditions of Tariff effective from
01.04.2004
Contd.
Rate Base (Para 3.3)

• In many cases, only essential systems and
  services, immediately required for operation of
  the stations are completed upto COD. Certain
  works remain pending and hence are not reflected
  in the capital cost.

• Tariff should have provision for revision due to
  above expenditures. At present the revision of
  tariff is not allowed if expenditure upto 20 of
  capital cost is incurred during the tariff
  period.
• This ceiling limit on capital expenditure should
  be removed.

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Presentation of NHPC on Discussion paper on
Terms Conditions of Tariff effective from
01.04.2004
FERV Payment (Para 3.3.6.5)

• In case of NHPC, FERV was initially being paid as
  per option - (i) Given in Discussed paper which
  was subsequently changed to option No. (ii) /
  (iii) as per CERC orders.
• The financial implications on tariff arising on
  account of change in the methodology for working
  out FERV should be computed for any project from
  the commercial operation date (COD) and any under
  or over payment should be adjusted in that
  particular year in which the change in
  methodology is proposed.
• The existing rate base is on Gross Fixed Assets
  (GFA) concept and same should be continued.

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Presentation of NHPC on Discussion paper on
Terms Conditions of Tariff effective from
01.04.2004
Contd.
FERV Payment (Para 3.3.6.5)

• The existing system should continue.
• However, consequent upon introduction of revised
  AS-11 effective from 01.04.2004, the ERV on
  repayment of principle amount are to be charged
  to PL account instead of adjustment in carrying
  cost of relevant fixed assets as per existing
  AS-11.
• The revised AS11 needs to be taken into
  consideration in order to avoid any confusion on
  the issue of ERV.

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Presentation of NHPC on Discussion paper on
Terms Conditions of Tariff effective from
01.04.2004
Interest on working capital (Para 3.4)

• The miscellaneous provision of 0.5 to take care
  of income tax proposed in the discussion paper is
  not based on any study and the amount of income
  tax varies from year to year and is not constant
  and therefore could not be considered as 0.5 for
  this purpose.
• The existing system to continue with maintenance
  spares taken as 1 of capital cost in case of new
  projects.
• Maintenance spares should be taken on the basis
  of five years average consumption in case of old
  projects.

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Presentation of NHPC on Discussion paper on
Terms Conditions of Tariff effective from
01.04.2004
Contd.
Operation and Maintenance cost (Para 3.5)

• The present method of working out the OM cost
  i.e. normative for new projects and average
  expenses duly escalated, for the old projects, is
  reasonable.
• The normative OM expenses for old projects based
  on historical cost of project would not be
  correct and would be insufficient keeping in view
  the high material, employees cost etc.
• The normative OM expenses on the basis of option
  B given in paper (Para 3.5.9) is not reasonable
  because the Hydro projects are tailor made and
  any two projects of same capacity (MW) are not
  identical as far as OM expenses are concerned.
• The OM expenses depend on the location of dam,
  weir, powerhouse, employees colony, topography
  and other related matters.

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Presentation of NHPC on Discussion paper on
Terms Conditions of Tariff effective from
01.04.2004
Contd
Operation and Maintenance cost (Para 3.5)

• The discussion paper proposes that in case of
  Hydro stations, the benchmark values may have to
  be specified for the following categories of
  stations (Para 3.5.14).

• Purely run of the river stations.
• Run of the river with pondage type of stations.
• Storage type of stations.

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Presentation of NHPC on Discussion paper on
Terms Conditions of Tariff effective from
01.04.2004
Contd
Operation and Maintenance cost (Para 3.5)
NHPC feels that the bench mark value is not
dependant on the type of stations as far as the
OM expenses are concerned but is dependant upon
the following factors-

• Lay out of the project.
• Location of the dam, plant, powerhouse etc.
• Location of the employees colonies.
• Topography of the area.
• Remoteness of the project.
• Law and order situation.
• Silt content in the water.
• Restriction imposed on the project design on
  account of international water treaty, if any.

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Presentation of NHPC on Discussion paper on
Terms Conditions of Tariff effective from
01.04.2004
Contd
Operation and Maintenance cost (Para 3.5)

• However, it is proposed that in case of new
  projects the OM expenses should be taken as 2.5
  of the capital cost. The escalation factor of
  10 should be adopted for older projects because
  escalation in employees cost has always been much
  higher than the increase in escalation factor.

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Presentation of NHPC on Discussion paper on
Terms Conditions of Tariff effective from
01.04.2004
Depreciation (Para 3.6)

• The amount of depreciation should cover the
  amount of repayment of loan during the year.

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Presentation of NHPC on Discussion paper on
Terms Conditions of Tariff effective from
01.04.2004
Operational Norms (Para 3.7.2)
Pricing of secondary energy

• The rate of secondary energy should not be less
  than the rate of primary energy because then only
  the generator will be incentivised to generate
  additional secondary energy.
• At the same time the beneficiary has not to pay
  the capacity charges on this secondary energy,
  therefore, this is always cheaper than primary
  energy for him.

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Presentation of NHPC on Discussion paper on
Terms Conditions of Tariff effective from
01.04.2004
Incentives for Hydro Stations (Para 3.8.2)

• Incentive Actual Peak Time Generation x
  Incentive Rate (Rs. / Kwh) x (CIA CIN) / 100
• The above formula proposed in the discussion
  paper takes into account the actual peak time
  generation which is related to the actual
  capacity index and therefore having the factor of
  actual capacity index along with the actual peak
  time generation does not seem to be justified.
• It is necessary that the peak hours are properly
  defined.
• The proposed formula should be made applicable to
  the storage type and peaking type stations only
• For the run of river stations, the existing
  formula for incentive should continue.

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Presentation of NHPC on Discussion paper on
Terms Conditions of Tariff effective from
01.04.2004
Development Surcharge (Para 3.9)

• The funds required for capacity addition are not
  to be mixed with the amount of depreciation and
  hence it should be separately dealt.
• The total amount of depreciation recovered
  through tariff is limited to 90 of the cost of
  the project and by increasing the rate of
  depreciation the total amount of depreciation
  does not increase. Therefore, the additional
  fund should be made available over and above the
  depreciation amount by way of development
  surcharge for capacity addition.

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Presentation of NHPC on Discussion paper on
Terms Conditions of Tariff effective from
01.04.2004
Contd
Development Surcharge (Para 3.9)

• Development surcharge collected from the sale of
  power by the generators should be utilised only
  for development of hydro sector, for improving
  hydro - thermal mix required for security and
  stability of the grid.
• The existing system to continue and there should
  be freedom with utility for deployment of
  development surcharge fund in rated securities
  available in market. No rebate should be given
  on development surcharge amount. However late
  payment surcharge is to be levied.

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Presentation of NHPC on Discussion paper on
Terms Conditions of Tariff effective from
01.04.2004
Tariff Period (Para 4.1)

• NHPC feels that tariff period should be 5
  years.

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Presentation of NHPC on Discussion paper on
Terms Conditions of Tariff effective from
01.04.2004
Regional Tariff (Para 4.2)

• Since the quality of end product i.e. power does
  not depend upon the project, from where it is
  generated, therefore NHPC feels that tariff
  should be only on regional basis for a generator.

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Presentation of NHPC on Discussion paper on
Terms Conditions of Tariff effective from
01.04.2004
Peak and off peak tariff in Bulk Generation (Para
4.3)

• Peak and off-peak tariff should be introduced .
• Peak tariff should not be more than double the
  off peak tariff.

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Presentation of NHPC on Discussion paper on
Terms Conditions of Tariff effective from
01.04.2004
Declared Capacity (Para 4.4)

• The amount for extra generation due to over -
  loading of machines should be over and above the
  Annual Fixed Charges (AFC) paid to the generator.
  
• Declared capability of the generator should be
  exclusive of over-loading capacity of the machine
  because declared capability is on continuous
  basis whereas over-loading of machine will depend
  upon various technical parameters / limits
  prescribed by the manufacturer.

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Presentation of NHPC on Discussion paper on
Terms Conditions of Tariff effective from
01.04.2004
Contd.
Additional Issues
The following additional issues may be considered

• The monthly capacity charges to be recovered
  should be proportionate to the design energy of
  that particular month and not in 12 monthly equal
  installments.
• The unscheduled interchange (UI) rate needs to be
  reviewed as this rate was fixed somewhere in
  1997-98.

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THANKS
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