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Before the
MAHARASHTRA ELECTRICITY REGULATORY COMMISSION
World Trade Centre, Centre No.1, 13th Floor, Cuffe Parade, Mumbai 400005.
Tel. 022 22163964/65/69 Fax 22163976
Email: [email protected]
Website: www.mercindia.org.in / www.merc.gov.in
Case No. 105 of 2012
IN THE MATTER OF
Petition filed by Lanco Teesta Hydro Power Private Limited for adjudication of
dispute and approval of provisional Tariff based on revised Project cost
Smt. Chandra Iyengar, Chairperson
Shri Vijay L. Sonavane, Member
Shri Azeez M. Khan, Member
Lanco Teesta Hydro Power Private Limited ...…Petitioner
Maharashtra State Electricity Distribution Company Limited ...… Respondent
Advocates/Representatives of the Petitioner: Shri Sanjay Sen, Advocate
Shri. Gyan Bhadra Kumar
Advocates/Representatives of Respondent : Smt. Deepa Chawan, Advocate
Shri A.S. Chawan, MSEDCL
ORDER
Dated: 20 August, 2014
M/s Lanco Teesta Hydro Power Private Limited (LTHPPL) had signed a Power
Purchase Agreement (PPA) with the Respondent, Maharashtra State Electricity
Distribution Company Limited (MSEDCL), on 29 August, 2006 for supply of power
from its planned 500 MW Teesta Hydro Power Project in Sikkim. The Tariff for the
first 25 years as per the PPA is fixed at Rs. 2.32 per kWh. However, citing increase in
MERC Order Case No. 105 of 2012 Page 2 of 29
the Project cost, LTHPPL has approached the Commission for approval of a
Provisional Tariff as per the applicable Regulations.
2. In its original Petition dated 24 September, 2012 under Section 86(1)(b) and (f) of the
Electricity Act (EA), 2003, LTHPPL had prayed for qualifying its liability following
its termination of the PPA, and for directions to MSEDCL to enter into a new PPA
with a Tariff based on new guidelines. Its prayers in the original Petition were as
follows:
“(i) Declare that the liability of the Petitioner towards the Respondent under the
terminated PPA dated August 29, 2006 shall be limited to payment of
compensation of Rs. 11,90,760 (Rupees Eleven Lakhs Ninety Thousand Seven
Hundred and Sixty Only)
(ii) Direct the Respondent to enter into a new power purchase agreement with the
Petitioner for supply of power from the 500 MW Teesta Stage VI Hydro Electric
Project from the commercial operations date, with tariff to be calculated as per
the Central Electricity Regulatory Commission (Terms and conditions of Tariff)
Regulations, 2009; …..”
3. However, in the course of the proceedings, LTHPPL withdrew its termination Notice
to MSEDCL on 18 October, 2013. Subsequently, on 19 December, 2013, LTHPPL
amended its Petition, with the following prayers:
“(i) determine a provisional revised levellised tariff of Rs. 4.49 per unit as per the
calculations provided in Annexure P19 in accordance with the CERC (Terms and
Conditions of Tariff Regulations, 2009 as per the calculations provided in
Annexure P19, based on the revised estimated Project cost of Rs. 5453.91 Crore
computed by the independent consultant (Tractebel Engineering) and direct the
Petitioner and the Respondent to incorporate such revised tariff in the PPA
(ii) grant liberty to the Petitioner to approach the Commission for determination of
final tariff following COD of the Project; and
(iii) Pass such other orders/directions as this Commission deems appropriate in
the interests of justice in the circumstances of the case.”
4. The contentions of LTHPPL in its revised Petition are summarised as below:
4.1. LTHPPL is a generating company within the meaning of the EA, 2003 and is in
the process of setting up the Teesta Stage VI Hydro Electric Project with a
MERC Order Case No. 105 of 2012 Page 3 of 29
capacity of 500 MW, comprising 4 Units of 125 MW each, on the Teesta River in
Sikkim. LTHPPL (formerly known as Lanco Energy Private Limited (LEPL))
signed an Implementation Agreement with the Government of Sikkim (GoS) on 7
December, 2005.
4.2. LTHPPL had executed a PPA with MSEDCL for sale of energy generated from
the Teesta Hydro Project for a period of 35 years from the Commercial Operation
Date (COD). The Tariff under the PPA was mutually agreed upon at Rs. 2.32 per
kWh for the first 25 years on the basis of the Project cost of Rs. 2996.89 crore
estimated in the Detailed Project Report (DPR).
4.3. MSEDCL had two options in respect of the Tariff for supply of power. A two-part
Tariff structure would have required MSEDCL to assume the Project
implementation, hydrological, interest rate and other risks, whereas a flat Tariff
for 25 years would transfer all Project risks to LTHPPL. MSEDCL insisted on a
single-part Tariff structure, and LTHPPL agreed to supply power at a fixed Tariff
and assume all Project risks. While assuming such risks, LTHPPL considered and
accounted for the reasonably foreseeable risks associated with a Project of this
nature. It did not or could not have anticipated or assumed unforeseeable and
unmanageable risks that LTHPPL is now faced with in the implementation of the
Project.
4.4. As protection against unforeseeable and unmanageable risks that would make the
Project unviable and unsustainable, LTHPPL and MSEDCL agreed upon a right to
terminate the PPA prior to COD without any penalty. Accordingly, Clause 15.4.1
of the PPA expressly permits LTHPPL to terminate the PPA prior to COD at its
option. A similar termination right prior to CoD is vested with MSEDCL under
Clause 15.5.1 of the PPA. In contrast, Clauses 15.4.2 and 15.5.2 provide for
termination after CoD by the respective parties by issuing a Preliminary
Termination Notice together along with a Letter of Credit for Rs. 500 Crore.
Clauses 15.4.3 and Clause 15.5.3 provide for termination by LTHPPL and
MSEDCL, respectively, for an event of default by the other party.
4.5. In the normal course, PPAs for hydro power projects are based on regulatory
norms, wherein the impact of the associated risks are compensated by the off-taker
by means of a pass-through mechanism. However, as per MSEDCL’s preference
for a fixed and flat Tariff of Rs. 2.32 per kWh for 25 years, the PPA in the present
MERC Order Case No. 105 of 2012 Page 4 of 29
case was customised in order to provide a right to both parties to terminate the
PPA prior to CoD without any penalty. If such a right had not been provided,
LTHPPL would not have entered into the PPA, nor would it have agreed to supply
power at a fixed Tariff for 25 years.
4.6. Approval was accorded by the Commission in Case No. 27 of 2006 dated 26 June,
2006, as revised in Case No. 40 of 2007 dated 8 May, 2008 to the PPA and the
Tariff therein for the first 25 years on the basis of certain parameters, including the
estimated capital cost of Rs. 2996.89 Crore.
4.7. Since the execution of the PPA, a series of uncontrollable events have occurred
which could not have been reasonably foreseen by LTHPPL at the time of
execution of the PPA and which have a direct and substantial impact on the capital
cost and time for completion of the Project. These events, set out below, have
caused and are expected to cause a cumulative delay of approximately 42 months
in its implementation.
Delays in Forest land diversion approval: Immediately after signing of the PPA,
LTHPPL had applied for diversion of forest land to the Department of Forest,
Environment and Wildlife Management (DoFE), GoS on 5 October, 2006. DOFE
recommended diversion of forest land for the Project to the Ministry of
Environment and Forest (MoEF), Government of India in November, 2006. MoEF
approval was delayed because of proceedings pending before the Supreme Court
relating to diversion of forest land for various infrastructure Projects. In April,
2008, the Supreme Court permitted MoEF to consider and allow diversion of forest
land for various Projects, including LTHPPL’s Project. MoEF granted approval for
diversion of forest land on 23 May, 2008 which, in the ordinary course, should
have been received by January, 2007. Subsequent to the MoEF approval, the
required forest land was handed over to LTHPPL in batches starting from June,
2008 and continued during October and November, 2008 for different critical
Project areas. As a result, Project implementation was delayed by approximately 16
months. This has also been verified as a cause of time over-run for the Project and
consequent increase in the Project cost by Hydro Tasmania (a consultant appointed
by LTHPPL) in its report. The Report of Tractebel Engineering Private Limited (a
Consultant appointed by LTHPPL during the present proceedings) also records the
initial delay on account of forest land diversion as 16 months.
MERC Order Case No. 105 of 2012 Page 5 of 29
Geological Surprises: Prior to signing of the PPA, it was envisaged that the rock
class to be encountered along the Head Race Tunnel (HRT) would be about 80% of
Good to Fair (Class I, II and III) and 20% of Poor and Very Poor rocks (Class IV &
V). However, the actual rock conditions encountered during construction are of a
more inferior quality. Based on the conditions encountered so far, the overall rock
quality till completion is expected to be of inferior quality (i.e., class IV and V
rocks are expected to be around 50%). Due to unexpected poor rock quality,
tunneling work has been greatly hindered, resulting in significant time and cost
over-runs despite adoption of the latest construction methodology for the Project.
Unexpected adverse geological conditions in the HRT have necessitated the
provision of a higher proportion of additional supports and additional provisions
for backfill concrete due to excessive over breaks. These are expected to delay the
Project implementation by 25 months and have a consequential upward impact on
the Project cost. The Tractebel Report states that:
“According to the investigation carried out by CWC/GSI at DPR stage it was
anticipated that about 80% good rock and 20% poor rock would be encountered in
this Project, especially in case of HRT.
….
…HRT is negotiating about 56% “Good and Fair rock” and 44% “Poor to Very
Poor” category of rock. However, considering the length of adits als, over-all rock
class in tunnel shall be about 50% “Good and Fair” and 50% “Poor and Very
Poor”. The rock mass classification in balance length of HRT excavation is
expected to be 60% under class III, 35% in class IV and 5% in class V.”
Earthquake in Sikkim: In September, 2011, there was a major earthquake in
Sikkim admeasuring 6.8 on the Richter scale. Due to the earthquake and resulting
labour and road disruptions, the Project work remained stalled for approximately
one month. This has also been verified by Hydro Tasmania as a cause of time over-
run and consequent increase in the Project cost.
Substantial change in Interest Rate environment: The interest rates considered for
tariff negotiations with the MSEDCL at the time of entering into the PPA were
10% p.a. during the construction stage, as reflected in the DPR, and 11% p.a. after
COD. The in-principle Tariff approved by the Commission also assumed an
interest rate of 11% p.a. However, the current weighted average interest being paid
MERC Order Case No. 105 of 2012 Page 6 of 29
is 13.78% p.a. Due to this unforeseen change and aforementioned time over-runs,
the Interest during Construction (IDC) component of the Project cost has increased
substantially. In addition, the debt:equity ratio considered for the purpose of Tariff
negotiation with MSEDCL and in-principle Tariff approval by the Commission
was 70:30. However, the actual debt:equity ratio following financial closure of the
Project is 80:20, which has also resulted in an increase in the IDC component. The
total increase in the IDC component of the Project cost on account of these events
works out to approximately Rs. 1496 crore (as per the Tractabel Report), which
constitutes almost 75% of the increase in the Project cost.
Increase in taxes and increased demands under Environment Mitigation Plan: After
signing the PPA, the GoS has imposed additional taxes under the Ecology Fund
and Environment Cess Rules, 2007 and the Sikkim Building and Other
Construction Workers Rules, 2009. In addition, the cost for implementing the
Catchment Area Treatment Plan under the Environment Mitigation Plan has
increased substantially as compared to the cost indicated in the DPR. LTHPPL has
submitted a copy of the demand letter received from the DoFE to support its
arguments. The impact of increased taxes and duties has been estimated at Rs.
17.39 Crore as per the Tractebel Report.
Increase in Pre-Operative Expenses: Due to delay in the commencement of Project
implementation caused by delayed MoEF approval for diversion of forest land,
time over run due to impact of geological surprises, etc., the pre-operative expenses
have increased significantly.
4.8. On account of these unforeseen events, there has been a substantial increase in the
estimated Project cost. Such events could not have been foreseen at the time of
signing the PPA and are clearly beyond the reasonable control of LTHPPL. The
Project cost as assessed in the Tractebel Report is Rs. 5453.91 crore as against Rs.
2996.89 crore estimated in the DPR. With an increase of approximately 80% over
the estimated Project cost in the DPR, the Tariff agreed upon in the PPA has
become completely unviable, and it has become commercially unreasonable and
impossible for LTHPPL to continue with the implementation of the Project at such
Tariff. The GoS has been apprised of these circumstances and consequent increase
in the estimated capital cost of the Project vide letter dated 22 June, 2012. The GoS
is supportive of the Project and desires that it be completed and operationalised at
the earliest.
MERC Order Case No. 105 of 2012 Page 7 of 29
4.9. An amount of Rs. 2,535.51 crore has already been infused into the Project as on
30 June, 2012, out of which disbursements made by the lenders of LTHPPL under
the financing agreements executed for the Project are to the tune of Rs. 1,762.42
crore. In view of the substantial increase in the capital cost of the Project,
additional funding is required from the lenders to complete the construction of the
Project and commence power supply. However, the lenders have expressed their
unwillingness to provide additional funding to the Project at a tariff of Rs. 2.32 per
kWh, which they consider to be unviable and insufficient for recovering the
Project debt. Even for further disbursements under the existing financing
agreements, the lenders have stipulated that these shall be subject to deliberations
amongst lenders until such time as the viability of the Project has been established
(including adequate increase in Tariff by the off-taker). In the absence of support
from the lenders, LTHPPL would be unable to commission the Project. LTHPPL
has made substantial investments in the development of the Project and would
bear huge financial losses in case its construction is stalled for want of funds. At
the current tariff of Rs. 2.32 per kWh, LTHPPL would be unable to meet its debt
servicing obligations towards its lenders, its Return on Equity would be negative
and its net worth would be eroded four years after the COD. Unless MSEDCL
agrees to revise the Tariff to ensure the viability of the Project, an important
national asset which is not dependent on fossil fuel would be wasted, and the
investments made so far by LTHPPL and its parent and the lenders would be lost.
4.10. Considering the revised estimates, assumptions and based on the Central
Electricity Regulatory Commission (CERC) (Terms and Conditions of Tariff)
Regulations, 2009, the levelised Tariff for the Project works out to Rs. 4.49 per
kWh. Considering the risks typically associated with them, the expected per
megawatt Project cost of similarly located hydro power projects are comparable to
the revised estimated cost for the Teesta Hydro Project. For instance, the estimated
per megawatt project cost of immediate downstream Projects, i.e. Teesta Lower
Dam - III and Teesta Lower Dam-IV are Rs. 12.33 crore/MW and Rs. 9.38
crore/MW respectively, and the expected per megawatt cost of the Teesta Hydro
Project is Rs. 10.80 crore/MW. Accordingly, considering the revised estimated
Project cost and assumptions, a Tariff of Rs. 4.49 per kWh in respect of the
Project is reasonable and competitive.
MERC Order Case No. 105 of 2012 Page 8 of 29
4.11. LTHPPL had requested MSEDCL to agree to a suitable adjustment in the Tariff
based on the revised capital cost of the Project in accordance with the CERC
Tariff Regulations. However, MSEDCL has not responded positively.
Accordingly, upon reaching a point where unless the lenders agreed to provide
additional funding to achieve completion of the Project, LTHPPL was left with no
alternative but to exercise its right to terminate the PPA by issue of a termination
Notice in accordance with Clause 15.4.1 of the PPA.
4.12. However, LTHPPL is ready and willing to supply power to MSEDCL at a
Tariff which is viable. It has accordingly, withdrawn the PPA termination
Notice vide its letter dated 18 October, 2013. The Tariff needs to be revised on
the basis of the actual capital cost of the Project incurred until COD, in
accordance with the CERC Tariff Regulations. Prior to the COD, the Commission
needs to approve a provisional Tariff based on the estimated Project cost.
4.13. The revised Tariff would be in the interest of all the stakeholders, including
LTHPPL, MSEDCL and the State of Sikkim, which is entitled to 12% of the
power generated from the Project free of cost for the first 15 years and 15% of the
power generated thereafter. It would also be in line with the objective of the
National Hydro Policy, 2008 to fully exploit the hydro power potential in Sikkim.
4.14. One of the objectives of EA, 2003 is to take measures conducive to the
development of the electricity industry. Under Section 61, the Commission,
while specifying the terms and conditions for determination of tariff, is
required to be guided by, inter alia, the following factors:
"(b) the generation, transmission, distribution and supply of electricity are
conducted on commercial principles;
(c) the factors which would encourage competition, efficiency, economical use of
the resources, good performance and optimum investments;
(d) safeguarding of consumers' interest and at the same time, recovery of the cost
of electricity in a reasonable manner."
4.15. Section 86(4) of EA, 2003 requires that, in the discharge of its functions, the State
Commission shall be guided by the National Electricity Policy and Tariff Policy.
Paragraph 5.2.6 of the National Electricity Policy provides that harnessing
hydro power potential speedily will also facilitate economic development of
States, particularly North-Eastern States, Sikkim, Uttaranchal, Himachal Pradesh
MERC Order Case No. 105 of 2012 Page 9 of 29
and Jammu & Kashmir, since a large proportion of hydro power potential is
located in these States.
4.16. The Tariff Policy dated 6 January, 2006 provides as follows:
"The objectives of this tariff policy are to ... ensure financial viability of the sector
and attract investments.…. Balance needs to be maintained between the
interests of consumers and the need for investments while laying down rate of
return. Return should attract investments at par with, if not in preference to, other
sectors so that the electricity sector is able to create adequate capacity."
Further, the Hydro Power Policy, 2008 issued by the MoP provides as follows:
"A hydroelectric Project has a long useful life extending to well over 50 years and
helps in conserving scarce fossil fuels. Development of hydro power Projects also
provides the added advantage of opening up avenues for development of remote
and backward regions of the country."
4.17. Consistent with these objectives and provisions, the Project being set up seeks to
use water from the Teesta river for production of electricity, thereby aiding in
tapping the hydro power potential in Sikkim, further reducing dependency on coal
and other fossil fuels and, in turn, contributing towards reduction in emission of
greenhouse gases.
4.18. The Hydro Power Policy emphasizes increasing private investment in power
development. The Policy also identifies geological surprises, location of Project
site, unavailability of long term financing and viability of tariff as the key issues
faced by private developers of hydro power Projects.
4.19. LTHPPL is willing to supply power to the MSEDCL at a Tariff based on the
actual cost of the completed Project upon achieving COD, in accordance with the
CERC Tariff Regulations. The Commission has the power and jurisdiction under
Section 86(1) (b) and (f) of the EA, 2003.
4.20. In the matter of Konark Power Projects Ltd. vs. Karnataka Electricity Regulatory
Commission & Others [Appeal No. 35 of 2011, dated February 10, 2012] the
Appellate Tribunal for Electricity (ATE) had observed that:
"The above guidelines [referring to S. 61 of the EA, 2003] would indicate that the
Commission has to maintain a balance of interests so that the generators also may
not suffer unnecessarily...
MERC Order Case No. 105 of 2012 Page 10 of 29
…. the Commission has powers to modify the tariff for a concluded Power
Purchase Agreement and the tariff under Section 62 should be so designed that the
generator should not suffer unnecessarily." [Text Inserted]
4.21. In the matter of Uttar Haryana Bijili Vitran Nigam Ltd. v. Haryana Electricity
Regulatory Commission and Others [Appeal No. 78 of 2011, dated April 27,
2012], ATE has observed that:
"Even when the PPA did not provide for a specific clause for revision of the
Project cost, the State Commission under the Regulations was empowered to re-
determine the tariff fixed by it under Section 62 of the Act."
4.22. ATE has also observed that, as per the Commission’s Regulations, the final Tariff
has to be determined based on the actual cost of the completed Project upon
achieving COD, and the Regulations framed under the enabling provisions of the
Act would override the PPAs of regulated entities.
4.23. In the case of Patikari Power Ltd vs. Himachal Pradesh Electricity Regulatory
Commission [Appeal No. 179 of 20101], ATE reiterated that the State
Commission can review a concluded PPA entered into between a renewable
energy generator and the procurer according to its own Regulations.
4.24. The MERC (Terms and Conditions of Tariff) Regulations, 2005 (R. 30) provide
that:
"Subject to prudence check by the Commission, the actual expenditure incurred
on completion of the Project shall form the basis for determination of the original
cost of Project. The original cost of Project shall be determined based on the
approved capital expenditure actually incurred up to the date of commissioning of
the generating station and shall include capitalized initial spares subject to
following ceiling norms as a percentage of the original cost as on the cut-off date”.
4.25. Given the unprecedented cost increase, it is imperative that the Tariff should
reflect the actual capital cost incurred until the CoD and not merely the indicative
cost contained in the DPR. Consequently, in accordance with the Regulations and
the cited provisions of EA, 2003, the Commission has the jurisdiction and the
power to re-determine the Tariff on the basis of the actual expenditure incurred on
completion of the Project and, pending COD, to approve a provisional Tariff
based on the revised estimated Project cost.
4.26. Such re-determination is to be carried out as per the Regulations and the principles
for tariff determination contained in S. 61. This contention finds support from the
MERC Order Case No. 105 of 2012 Page 11 of 29
Judgment dated 31 May, 2012 of ATE in Tarini Infrastructure Limited v/s. Gujarat
Urja Vikas Nigam Ltd. [Appeal No. 29 of 2011] wherein, while upholding the
power of the State Commission to re-open the power purchase agreement and re-
determine tariff, it was held as follows:
"The State Commission as indicated in the impugned order has power to modify
the tariff for concluded PPA in larger public interest. The guiding principles laid
down in Section 61 of the 2003 Act would indicate that the Commission has to
maintain a balance so that the generators also may not suffer unnecessarily. In the
context of prevailing power situation in the country, it would not be desirable to
keep any generating unit out of service for want of ‘just' tariff.....
It is the settled principle of law that a PPA can he revisited by the Commission
which is statutorily enjoined with the duty of determination of tariff in light of the
principles laid down in Section 61 of the (Electricity) Act."
4.27. The "prudence checks" referred to in R. 30 of the Tariff Regulations have not been
elucidated in the Regulations, but have been laid out by ATE in its Judgment
dated April 27, 2011 in the matter of Maharashtra State Power Generation Co. Ltd
v/s. MERC and others [Appeal No. 72 of 2012] in reading R. 30.1 in the context
of time over-run related costs, as follows:
"The delay in execution of a generating Project could occur due to the following
reasons:
(i) Due to factors entirely attributable to the generating company... ;
(ii) Due to factors beyond the control of the generating company e.g. delay
caused due to force majeure like natural calamity or any other reasons
which clearly establish, beyond any doubt, that there has been no
imprudence on the part of the generating company in executing the Project;
(iii) Situation not covered by (i) & (ii) above.
... In the second case, the generating company could be given the benefit of
the additional cost incurred due to time over-run."
4.28. Thus, the Commission has the jurisdiction and power to re-determine Tariff for
supply of power, subject to prudence checks as above. It is further submitted that,
in this case, the basis for increase in the capital cost for the Project as against the
cost envisaged under the DPR arose out of factors beyond the control of LTHPPL
and, therefore, the aforementioned provisions are squarely attracted.
4.29. It is the function of the Commission to promote and give effect to the
aforementioned objectives of the EA, 2003, National Electricity Policy, Tariff
MERC Order Case No. 105 of 2012 Page 12 of 29
Policy and Hydro Power Policy and, in doing so, to ensure that the Tariff reflects
the cost of electricity generation. LTHPPL has made huge investments in its
Project and is using the latest construction methodology. The huge investments
made by LTHPPL and the lenders would be lost if the Tariff is not revised. It
would also adversely affect the interests of the State of Sikkim, which is entitled
to a certain percentage of power from the Project free of cost.
4.30. MSEDCL has indicated its interest in buying power from the Project, but on the
terms of the PPA. Since there has been a substantial change in circumstances and
Tariff as per the PPA has become unviable, LTHPPL is seeking a revision in
Tariff in accordance with the applicable Regulations.
4.31. Citing the computations as per the CERC and MERC Regulations, LTHPPL
requests the Commission to adopt the CERC Tariff Regulations. If the
Commission wishes to apply the MERC Regulations, these may be applied after
making suitable changes in the formula as per the problem identified in the
computations.
4.32. Based on the above, LTHPPL prays that the Commission approve a provisional
revised Tariff of Rs. 4.49 per kWh, and seeks liberty to approach it for
determination of the final Tariff after COD of the Project.
5. At the hearing on 22 October, 2012, the Commission directed LTHPPL to submit the
present status of the Lanco Teesta Project and reasons for delay in Project completion.
It also directed LTHPPL to approach the Central Electricity Authority (CEA) for
approval of the revised DPR, including the additional cost incurred or likely to be
incurred. LTHPPL was also asked to submit the Bulk Power Transmission Agreement
to the Commission. The Commission directed MSEDCL to file its paragraph-wise
Reply to the Petition.
6. LTHPPL approached CEA through letter dated 8 November, 2012 asking for
necessary directions for getting approval for a revised DPR, including the capital cost.
However, vide letter dated 14 November, 2012 addressed to LTHPPL with a copy to
the Commission, CEA responded that, as per the EA, 2003, the examination of
revised cost estimates is not vested with CEA. LTHPPL requested the Commission
vide letter dated 21 November, 2012 to advise on appointment of an independent
Consultant for carrying out the exercise for approving the revised cost of the Teesta
Hydro Project.
MERC Order Case No. 105 of 2012 Page 13 of 29
7. At the hearing on 27 November, 2012, the Commission again directed MSEDCL to
file its Reply to the Petition.
8. Vide letter dated 3 December, 2012, LTHPPL submitted the names and credentials of
three hydro power consulting firms. It stated that these firms were also approved by
MSEDCL, and as such could be appointed for the assignment. Vide letter dated 14
December, 2012, it submitted the proposed scope of work for the Consultant for the
consideration of the Commission.
9. At the hearing on 19 December, 2012, the Commission directed both parties to
mutually discuss this issue and finalise the name of an independent Consultant,
prepare the draft Terms of Reference (ToR) for the assignment, and submit them for
its approval.
10. The matter was again heard on 24 January, 2013. MSEDCL made a submission
raising preliminary objections on the Petition pertaining to the maintainability of the
original Petition. LTHPPL had subsequently withdrawn its termination Notice, and
hence these submissions of MSEDCL are not set out in this Order.
11. Vide letter dated 8 February, 2013, LTHPPL informed the Commission that it had
appointed M/s. Tractebel Engineering Private Limited to carry out the study on
assessment of cost over-run of the Teesta hydro Project.
12. LTHPPL submitted its reply on 30 April, 2013 to MSEDCL’s submission dated 24
January, 2013, stating that the Commission has the power and jurisdiction to grant the
reliefs sought in its Petition, and that it has filed a separate Application for amendment
to the Petition.
13. In another submission on 30 April, 2013, LTHPPL amended the prayers contained in
its original Petition as follows:
“
(i) Declare that the liability of the Petitioner towards the Respondent under
the terminated PPA dated August 29, 2006 shall be limited to payment of
compensation of Rs. 11,90,760…
(ii) In the alternative, direct the petitioner and the Respondent to revise the
tariff under PPA, to be calculated as per the Central Electricity Regulatory
Commission (Terms and conditions of Tariff) Regulations, 2009.
(iii) In the alternative to (ii) above, direct the Respondent to enter into a new
power purchase agreement with the petitioner for supply of power from 500
MERC Order Case No. 105 of 2012 Page 14 of 29
MW Teesta Stage VI Hydro Electric Project from the commercial
operations date , with tariff to be calculated as per the Central Electricity
Regulatory Commission (Terms and conditions of Tariff), 2009; and
(iv) Pass such other order/ directions as this Commission deems appropriate in
the interest of justice in the circumstances of the case.”
14. At the hearing on 5 June, 2013, the Commission directed MSEDCL to state in writing
whether it needs the hydro power from LTHPPL.
15. Tractebel Engineering submitted its final Report on the assessment of cost over-run of
the Teesta Hydro Project on 20 June, 2013. Its main conclusions are as follows.
15.1. The analysis of time over-run for the Project is shown in the Table below:
Sr. No. Particular Time over-run
(months)
1 For executed Project components upto December 2012
1A Initial delay on account of forest land diversion for crucial
works, i.e., Adit 2 & 3
16
1B Delay on account of major earthquake in September 2011 1
1C Delay on account of adverse Geology/Geological surprises 12
i In Adits 12
ii In HRT 7
Total 36
2 For the balance Project components /Geological surprises 12
Total Time over-run in months 48
The time over-run has resulted in cost over-run by way of increased EPC cost as
well as increase in soft costs like escalation, IDC, FC, etc. Besides, design and
scope changes as per the geological conditions encountered at the site during the
construction phase have also resulted in an increase in the cost of the Project.
15.2 Cost over-run due to civil works has been worked out on the basis of increase in
direct costs due to geological surprises encountered in tunnels and other reasons such
as increase in works cost due to delay till December, 2012, price variation beyond
December, 2012 till completion, etc. The break-up is as below:
Sr. No. Description Amount (Rs. Cr.)
1 Direct Charges
1.1 Due to Geological Surprises 616.55
1.2 Due to reasons other than Geological Surprises
1.2.1 Increase in works cost due to delay till
December 2012
319.06
1.2.2 Price variation beyond December 2012 till
Completion
92.54
Total Direct Charges 1028.15
MERC Order Case No. 105 of 2012 Page 15 of 29
Sr. No. Description Amount (Rs. Cr.)
2 Indirect Charges 8.58
Total 1036.73
15.2.1 Cost over-run due to geological surprises has been calculated on the basis of
difference in cost of excavation, rock support, grouting, etc. for rock classes assessed in
DPR and actually encountered/anticipated for balance works considering item rates for
various works as on December, 2012. The comparison between the costs as per DPR and
actual/assessment for the Head Race Tunnel is given below:
Particulars As per DPR Current Assessment
Length 11800 x 2 m 13753 x 2 m
Expected Rock Class Percentage Length (m) Percentage Length (m)
Class I,II,III* 80% 18,880 56% 15,309
Class IV* 20% 4,720 41% 11,384
Total Cost (In Rs. Cr.) 798.12 1414.67
Difference (In Rs. Cr.) 616.55
*Rock Classification
Class-I,II, III - Good to fair rock
Class IV, V - Poor to Very Poor Rock
15.1.2 Cost over-run due to reasons other than Geological Surprises comprises increase in
costs due to delay till December, 2012, price variation beyond December, 2012 till
completion, etc. It also includes the increase in cost of land, buildings,
environmental measures, establishment, etc. Cost impact of major deviations in
sizes/specifications during the detailed design stage has also been included. The
cost over-run on these parameters has been estimated at Rs. 319.06 crore.
15.1.3 Cost over-run due to price variation from December 2012 till the expected
completion of the Project in May, 2016 has been estimated on a quarterly cash flow
basis, and works out to Rs. 92.54 Crore.
15.2 The increase in financial cost has been worked out as follows:
Increased Interest During Construction – Rs. 1492.56 crore
Financial expenses, such as Margin Money, etc. – Rs. 45 crore
Increased Taxes and Duties – Rs. 17.39 crore
Sale of Infirm Power – (-) Rs. 161 crore
15.3 The estimated completion date of the Project is May, 2016, and the revised Project
cost has been worked out as Rs. 5453.9 crore, including IDC and Fixed Cost.
16 Vide letter dated 26 June, 2013, MSEDCL submitted that LTHPPL has to supply
power as per the PPA Tariff. Hence, it would not be appropriate to discuss changes in
MERC Order Case No. 105 of 2012 Page 16 of 29
the Tariff, but the Commission may decide the matter. MSEDCL made another
submission on 28 June, 2013 stating that it had entered into the PPA with LTHPPL,
since it is in need of long-term power. However, MSEDCL needs hydro power from
the Teesta Hydro Project as per the terms and conditions of the PPA.
17 At the hearing on 2 July, 2013, the Commission noted that MSEDCL has stated that it
is keen to procure 500 MW power from the Teesta Hydro Project, while LTHPPL
Lanco has stated that it is keen to sell the power to MSEDCL. However, the dispute
raised by LTHPPL is that the Tariff as fixed earlier has become unworkable in view
of the time and cost over-runs. MSEDCL and LTHPPL were asked to clarify the
following:
A. What were the circumstances under which MSEDCL filed a Petition in
2006 for fixation of Tariff under Section 62 of EA, 2003, since normally it
is the Generation Company which files a Petition for the purpose?
B. Paragraph 6 of the Petition needs elaboration and clarification.
C. How was the allocation of risk to be handled, during negotiations between
the parties in 2006?
D. In view of the disaster that took place in Uttarakhand, is there any
necessity to have a second look on issues related to Himalayan geology?
Will that have an impact on the cost of this Project?
E. LTHPPL may want to have a relook at its Petition and consider if any
amendment / fresh Petition is needed.
F. LTHPPL and MSEDCL should submit the chronology of events from the
signing of the PPA.
18 LTHPPL submitted an Application on 24 July, 2013 for further amending its Petition,
with revised prayers as follows:
“
(i) Declare that the liability of the Petitioner towards the Respondent under
the terminated PPA dated August 29, 2006 shall be limited to payment of
compensation of Rs. 11,90,760 (Rupees Eleven Lakhs Ninety Seven
Hundred and Sixty Only)
(ii) In the alternative and without prejudice to prayer (i) above, approve a
revised provisional tariff calculated accordance with the CERC( Terms and
Conditions of Tariff) Regulations, 2009 based on the revised estimated
Project cost and direct the Petitioner and the Respondent to incorporate
such revised tariff in the PPA.
MERC Order Case No. 105 of 2012 Page 17 of 29
(iii) grant liberty to the Petitioner to approach the Commission for
determination of the final tariff following COD of the Project; and
(iv) Pass such other order/ directions as this Commission deems appropriate in
the interest of justice in the circumstances of the case.”
19. Vide letter dated 29 July, 2013, MSEDCL submitted as follows:
19.1 With regard to the circumstances in which it filed a Petition in 2006 for fixation
of Tariff under Section 62 of the EA Act, 2003, MSEDCL submitted that it was
required to file the PPA under Clause 6.1 of Part B along with the application
under the MERC (Conduct of Business) Regulations, 2004. R. 6.2 of Part B
sets out the procedure for making an application for determination of Tariff of
any Licensee or Generation Company, and Part D of the Regulations sets out
the procedure for electricity purchase and procurement.
19.2 MSEDCL had submitted the Petition for approval of long-term power
procurement from LEPL under Part VII (S. 61 to 64) of EA, 2003 on 30
August, 2006 in compliance with the MERC (Terms and Conditions of Tariff)
Regulations, 2005. It had submitted in its Petition that the PPA executed with
LEPL was in accordance with MoP guidelines and the Tariff Policy, as the
Project was offered to MSEDCL prior to 6 January, 2006 and had applied for
approval to financial institutions before that date. Based on MSEDCL’s
submissions, the Commission had found that that the Petition satisfies the
following conditions mentioned in the clarification of MoP dated 28 March,
2006:
The loan sanction process was initiated prior to 6 January, 2006; and
MSEDCL had submitted the Petition for approval of PPA to the Commission
before 30 September, 2006.
19.3 MSEDCL submitted that, since its Petition was outside the purview of Clause
5.1 of the Tariff Policy regarding procurement of future power requirement
only through a competitive bidding process, the Commission admitted it for
further regulatory process.
19.4 As regards the risk-sharing framework discussed during negotiations between
the parties in 2006, MSEDCL submitted that the risk allocation was worked out
by adopting a single-part tariff on a fixed and flat tariff basis as below:
MERC Order Case No. 105 of 2012 Page 18 of 29
Sr. No. Risk Allocation of Risk
1 Hydrological Risk Risk is with the Seller
2 Project Cost Escalation
Risk
Fixed at Rs. 2996.87 Crore and Tariff was worked out
on this cost. Any variation in the Project cost have to
be absorbed by the developer only.
3 Debt: Equity Structure Tariff worked out as per 70:30 structure, any variations
to the account of developer as the Tariff is fixed.
4 Interest Rate variation
Risk
Risk is with the developer.
19.5 MSEDCL also submitted the following chronology of events:
Sr. No. Date Particulars
1 29 August, 2006 PPA signed at a fixed Tariff rate of Rs. 2.32 per kWh
2 30 August, 2006 Petition filed with MERC for approval of PPA (Case No.
27 of 2006), under S. 61 to 64 of EA, 2003
3 30 August, 2006 MSEDCL applied for long term open access to PGCIL for
evacuation of power from LEPL
4 17 October, 2006 LEPL applied to MSEDCL and PGCIL for evacuation of
power from LEPL
5 16 January, 2007 LEPL submitted Memorandum and Articles of Association
6 26 June, 2007 Commission’s Order in Case No. 27 of 2006 issued
7 21 July, 2007 Letter from LEPL to MSEDCL for amendment in PPA
8 25 July, 2007 MSEDCL submitted PPA amendment to the Commission
9 14 January, 2008 MSEDCL filed Petition for review of Order in Case No. 27
of 2006 on approval of PPA with LEPL
10 8 May, 2008 Commission’s Order in Case No. 40 of 2007 issued
11 25 September,
2008
PPA amended
12 4 October, 2010 Letter from LEPL informing increased Project cost of Rs.
3238.08 Crore and requesting increase in Tariff
13 4 November, 2010 Letter from MSEDCL to LTHPPL to withdraw Notice and
comply with PPA
14 23 August, 2011 Letter from LTHPPL to MSEDFCL for PPA review and
revision of Tariff
15 9 December, 2011 Letter from LTHPPL to MSEDCL requesting Tariff
revision citing reasons for delay and cost increase beyond
the control of developer
16 20 June, 2012 PPA Termination Notice issued by LTHPPL to MSEDCL
17 30 June, 2012 MSEDCL replied to LTHPPL vide letter dated 23 August,
2011 rejecting its demands
18 22 September,
2012
Petition filed by LEPL in MERC for revision in Tariff in
Case No. 105 of 2012
* List of dates and events after the filing of Petition given by MSEDCL is not presented
here
20. The matter was again heard on 30 July, 2013, when the Commission noted as
follows:
MERC Order Case No. 105 of 2012 Page 19 of 29
a) There is need for clarity as to whether the jurisdiction to decide such an issue
would lie with CERC or this Commission.
b) In 2006, when the PPA was signed, a conscious option was exercised by
MSEDCL and agreed to by LTHPPL for a single-part Tariff based on the
relevant CERC Tariff Regulations rather than a two-part Tariff as envisaged in
the MERC Tariff Regulations. The basic difference between these two options
is that, under the single part Tariff, no capacity charge is payable and the risk
involved in the fixed cost of the Project is borne by the developer.
c) Since MSEDCL has stated that it is keen to procure 500 MW from the Project as
per the terms of the PPA, the issue that remains between the two parties is that
of the viability of the Tariff in the PPA. This needs to be discussed between the
parties so that an agreed solution can be found to the commercial terms.
Accordingly, the Commission directed the parties to attempt to settle the matter
among themselves, and thereafter obtain the required approval.
21. MSEDCL submitted, on 16 September, 2013, that it had signed a PPA with LTHPPL
and, accordingly, LTHPPL has to supply power as per the PPA Tariff. Hence, the
question of a settlement in respect of Tariff revision does not arise. The Commission
may decide the matter in line with the PPA provisions.
22. In its submission dated 21 October, 2013, LTHPPL has stated as follows:
22.1 LTHPPL has agreed to withdraw its termination Notice dated 20 June,
2012 and would pursue its request for determination of a viable Tariff
under the PPA in accordance with the CERC (Terms and Conditions of
Tariff), Regulations, 2009, including a provisional Tariff based on the
revised Project cost estimate submitted by the independent Consultant
Tractebel. Such provisional Tariff would allow the Project to be completed
within a reasonable time, and the final Tariff would be determined based
on actual costs after the commercial operation of the Project.
22.2 Irrespective of the above, the grounds stated in the termination Notice
dated 20 June, 2012 continue to be valid, and LTHPPL is entitled to terminate
the PPA in accordance with Section 15.4.1 of the PPA. LTHPPL reserves all its
rights under the PPA and the applicable law.
23. LTHPPL filed another submission on 31 October, 2013:
MERC Order Case No. 105 of 2012 Page 20 of 29
23.1 Citing the provisions of S. 62 and 86 (1) (b) of EA, 2003, LTHPPL
submitted that, in exercise of the powers vested in it, the Commission had
approved the Tariff under the PPA vide its Orders in Case Nos. 27 of 2006
and 40 of 2007 in exercise of its powers under Section 62. Section 63 of
EA, 2003 is not applicable in the present case since the Project is not being
set up pursuant to a Tariff-based competitive bidding process.
23.2 LTHPPL submitted that the Commission has powers under the EA, 2003
to determine and, if necessary, re-determine the provisional Tariff of a
generating company under Section 62 read with Section 86 (1)(b).
LTHPPL cited several judgements which have dealt with the aspect of the
power to re-determine the Tariff and recovery of the cost of generation:
Order of Punjab State Electricity Regulatory Commission (PSERC) dated 17
August, 2012 in PTC India Limited V/s. Punjab State Power Corporation
Limited (Petition No. 34 of 2011);
Supreme Court judgement in Transmission Corporation of Andhra Pradesh V/s.
Sai Renewable Power Pvt. Ltd. ((2011) 11 SCC 34);
ATE judgment in the matter of HPSEB v/s UERC (Appeal No. 183 of 2009);
ATE judgment in Konark Power v/s. Bangalore Electric Supply Co. Ltd.
(Appeal No. 35 of 2011);
ATE judgment in Uttar Haryana Bijili Vitran Nigam Ltd. v/s. Haryana
Electricity Regulatory Commission and others (Appeal No. 78 of 2011); and
ATE judgment in Patikari Power v/s. Himachal Pradesh Electricity Regulatory
Commission (Appeal No. 179 of 2010).
23.3 LTHPPL reiterated the reasons for increase in the Project cost, and submitted
that the revised Tariff would work out to Rs. 4.49 per kWh. At the present PPA
Tariff of Rs. 2.32 per kWh, it would bear huge financial losses and be unable to
meet its debt obligations.
23.4 Since there has been no positive response from MSEDCL on LTHPPL’s
request for a Tariff hike in view of substantial cost over-run affecting the
commercial viability of the Project, LTHPPL had, vide its letter dated June 20,
2012, issued a Notice of termination of the PPA to MSEDCL in exercise of its
right of termination under Section 15.4.1 of the PPA.
MERC Order Case No. 105 of 2012 Page 21 of 29
23.5 The Commission, at the hearing on 15 October, 2013, had directed it to clarify
the status of the PPA, i.e. whether the PPA stood terminated or was in effect.
LTHPPL submitted that the Commission was of the considered view that the
termination Notice cannot co-exist with a plea seeking a revision of Tariff.
Although LTHPPL maintains that alternate inconsistent pleas are permitted in
law and the prayers in its Petition do not suffer from any infirmity, in view of
the suggestions made by the Commission and its own willingness to supply
power to the MSEDCL at a viable tariff, LTHPPL has withdrawn the
termination Notice vide letter dated 18 October, 2013 to MSEDCL. Such
withdrawal has been made without prejudice to its rights.
24. In another submission on 5 December 2013, LTHPPL argued that there are certain
errors in the formula for computation of Energy Charge Rate under the MERC
(Multi Year Tariff) Regulations, 2011. Aside from this, LTHPPL is agreeable for
Tariff computation under either CERC or MERC Tariff Regulations.
25. LTHPPL sought to further amend its Petition through its submission dated 19
December, 2013, seeking that the Commission
“(a) determine a provisional levellised tariff of Rs. 4.49 per unit as per the
calculations provided in Annexure P19, in accordance with the CERC (Terms
and Conditions of Tariff) Regulations, 2009 as per the calculations provided in
Annexure P19, based on the revised estimated Project cost of Rs. 5453.91
crores computed by the independent consultant (Tractebel Engineering) and
direct the Petitioner and Respondent to incorporate such provisional revised
tariff in the PPA;
(b) grant liberty to the Petitioner to approach the Hon’ble Commission for
determination of final tariff following COD of the Project; and
(c) Pass such other orders/directions as this Hon’ble Commission deems
approporiate in the interests of justice in the circumstances of the case.”
26. Other than the modification in prayers, LTHPPL’s latest amended Petition
extensively sets out essentially the same background, citations and averments as in
its earlier submissions. The Petition seeks that the Commission apply the CERC
Regulations for computation of both capacity and energy charges for the Project, as
purportedly considered by the Commission while approving the original Tariff
itself. In case the MERC Regulations are to be applied, this may be done only after
making suitable changes to the Energy Charge Rate formula in those Regulations.
LTHPPL has contended that there are errors in the formula for tariff calculation
MERC Order Case No. 105 of 2012 Page 22 of 29
and related aspects of the MERC Regulations, and has provided detailed
comparitive computations to support its claim. The amended Petition also updates
the costs incurred on the Project, to Rs. 2535.51 crore as of September, 2013, and
of disbursements made by lenders to Rs. 1762.42 crore, for which certification by
statutory auditors is annexed.
27. At the hearing on 6 February, 2014, the Commission directed MSEDCL to clarify,
with the approval of its Board, whether it was interested in purchasing power from
LTHPPL’s Project or not; if so, whether it would purchase the power at a revised
Tariff; and whether it would be willing to terminate the contract if LTHPPL is
unable to provide power at the Tariff agreed to earlier. LTHPPL was directed to
clarify the expected date of commissioning, and provide an assurance of power
availability from the Project as per the proposed revised schedule.
28. In its submission dated 5 March, 2014, LTHPPL stated that the Tractebel Report
had estimated the completion date of the Project as May, 2016, i.e. 36 months
would be required to complete the remaining works. The completion date would be
linked to the date of resumption of works. If the relief sought by it is granted by the
Commission, LTHPPL would be able to commence work a month thereafter and
complete it in the following 36 months. Subsequently, on 2 April, 2014, after a
hearing on 27 March, 2014, LTHPPL has submitted that, considering the quantum
of work remaining and challenging geological conditions at the site, the Project is
expected to be commissioned in March 2017.
29. In its submission dated 26 March, 2014, MSEDCL stated that it had raised the
preliminary issue of maintainability of the proceedings on the ground that
inconsistent reliefs for determination/revision of tariff cannot be sought if the
Petition is filed on the basis of termination of the PPA. With regard to the queries
framed by the Commission at the last hearing, MSEDCL’s position, as approved
by its Board, is as follows:
i) Whether MSEDCL was interested in purchase of hydro power from the Teesta
Project or not?
MSEDCL is certainly interested in procurement of hydro power from the Teesta
Hydro Project, for the purpose of which it has entered into the PPA.
ii) If so, whether it would purchase such power at a revised Tariff or not?
MERC Order Case No. 105 of 2012 Page 23 of 29
MSEDCL is a public sector undertaking and cannot agree to revision of the PPA
Tariff as LTHPPL secured this contract after considering all relevant factors affecting
its viability. LTHPPL is not entitled to seek Tariff revision by contending that the
contract has become commercially unviable. It is bound to supply power at the rate
agreed upon under the PPA. It would not be in the interest of consumers and the larger
public interest to revise the tariff as sought by LTHPPL, particularly after entering into
the PPA for such a long period
Whether MSEDCL is willing to terminate the contract if LTHPPL is unable to
provide power at the agreed Tariff?
Termination by MSEDCL does not arise. MSEDCL is willing to perform the
PPA and purchase power from LTHPPL at the PPA rate which has been
approved by the Commission. It is LTHPPL which first sought to terminate the
PPA and approached the Commission for Tariff revision. Subsequently, LTHPPL
withdrew the termination Notice and has sought amended reliefs. Since MSEDCL
is willing to perform the PPA, it cannot accept the termination of the PPA by
LTHPPL.
Commission’s Analysis
LTHPPL has approached the Commission for determination of a viable Tariff
under the PPA in accordance with the CERC (Terms and Conditions of Tariff),
Regulations, 2009, and a provisional Tariff. The Commission has analysed the
issues arising in the present Petition in terms of (A) what was the regulatory
framework under which the power procurement and Tariff were approved? (B)
whether, under the contractual framework, there is any scope for revision of the
Tariff? (C) Whether LTHPPL’s prayer for revision in Tariff based on higher
Project cost is is tenable?
A) What was the regulatory framework under which the power procurement and Tariff
were approved?
30. MSEDCL had approached the Commission under Sections 61 to 64 of the EA,
2003 in Case No. 27 of 2006 for approval of long-term power procurement from
LEPL’s Teesta Hydro Project. In its Order, the Commission accorded in-principle
approval to the single-part Tariff of Rs. 2.32 per kWh for 25 years, and ruled that it
MERC Order Case No. 105 of 2012 Page 24 of 29
would determine the final Tariff upon completion of the Project considering the
actual capital cost, subject to a ceiling of Rs. 2998.8 Crore.
31. MSEDCL filed a Petition (Case No. 40 of 2007) for review of that Order. It
submitted that Regulation 5.1 of the MERC (Terms and Conditions of Tariff)
Regulations, 2005 confers upon a generating company the discretion to agree to
any terms and conditions that may vary from the terms and conditions contained in
those Regulations, in cases where the terms and conditions so agreed result in a
lower total Tariff during the entire duration of the Agreement. MSEDCL submitted
that the PPA entered into with LTHPPL has been structured so as to achieve the
lowest possible Tariff, which will result in lower cost of supply of electricity to
consumers. MSEDCL stated further that it had entered into the PPA based on a
single-part Tariff, thereby ring fencing the major risks related to hydrology,
finance, capacity charges and Project costs.
32. In its Order dated 8 May, 2008 in that matter, the Commission had ruled as
follows:
“31. The Tariff Regulations stipulate that the actual expenditure incurred on
completion of the Project shall form the basis for determination of original cost of
the Project subject to prudence check by the Commission. The PPA executed
between MSEDCL and LEPL mentions the Project Cost considered for
determination of tariff and does not mention the ceiling of actual capital
expenditure. Further, as per provisions of PPA, the tariff has been fixed and
agreed for the entire duration of the PPA at assumed cost and means of finance
and cost over-run including the variations in financing package is to be borne by
LEPL.
32. The Commission finds merit in MSEDCL’s submission that in the past, cost-
over run has been observed in most of the hydel Projects and thus, if the actual
completed cost is to be considered for determination of tariff as per the
Commission’s Tariff Regulations, it may lead to increase in the tariff.
….
35. As the two-part tariff consisting of Annual Fixed Charges and Energy Charges
determined in accordance with the Regulations considering the actual completed
Project Cost may result in higher levelised tariff to MSEDCL as compared to tariff
agreed in the PPA executed by MSEDCL with LEPL and considering the fact that
MERC Order Case No. 105 of 2012 Page 25 of 29
the capital cost over-run risks, hydrological risks and interest rate variation risks
are to the account of LEPL, the Commission, in public interest, approves the
fixed and flat tariff of Rs 2.32/kWh for the period of 25 years without any
adjustments with respect to actual completed cost, means of finance, financing
package and treatment of infirm power upon commissioning of the Project. The
fixed and flat tariff of Rs 2.32/kWh for the period of 25 years meets the
requirement of Regulation 5.1 of MERC (Terms and Conditions of Tariff)
Regulations, 2005.” (Emphasis added)
33. Thus, the Commission approved a fixed Tariff of Rs. 2.32/kWh for 25 years as per
the then prevailing Regulations, which allowed for determination of Tariff in
accordance with terms and conditions which were different from the Tariff
determination norms of the Commission. The Commission had allowed a Tariff to
be determined based on the terms agreed between the parties only because the
Tariff so arrived at was lower than a Tariff that might be derived under the
prevailing Regulations.
34. Importantly, the major argument of MSEDCL in Case No. 40 of 2007 was that
risks related to hydrology, finance, fixed charges and Project cost were to be borne
by LEPL.
B) Whether, under the contractual framework, there is any scope for revision in
Tariff?
35. The Commission notes that the Tariff has been specified in Schedule D of the PPA.
A fixed Tariff of Rs. 2.32 per kWh has been specified for 25 years. The Tariff
applicable from the 26th
to the 35th
year is to be negotiated in the 25th
year and
arrived at by mutual consent of the parties.
36. Schedule D of the PPA states that:
“The Tariff rate which is fixed over the relevant Tariff years shall not change
inspite of the changes in the following assumptions:
a) The capital cost of Rs. 2996 Crore…” (Emphasis added)
37. From the above, it is clear that the Tariff agreed between the parties is to remain
fixed at Rs. 2.32 per kWh regardless of any change that might take place in the
capital cost.
MERC Order Case No. 105 of 2012 Page 26 of 29
38. As regards the geological condition of the site, the PPA provides that:
“5.2 The Site
LEPL agrees that it shall bear full responsibility for Site condition (including but
not limited to its geological condition and the adequacy of the road, rail or other
transportation links to the Site) and the acquisition of title to the Site free of all
encumbrances. LEPL further agrees that under no circumstances shall it be
entitled to any financial compensation due to the unsuitability of the Site”
(Emphasis added)
39. Thus, the PPA makes it clear that LEPL has taken complete responsibility for the
geological conditions of the site, and is not entitled to any financial compensation
due to unsuitability of the site. Accordingly, as per the PPA signed between the
parties, irrespective of any change in capital cost or issues relating to the geological
conditions of the site, the Tariff was to remain fixed at Rs. 2.32 per kWh for the
first 25 years.
C) Whether LTHPPL’s prayer for revision in Tariff based on higher Project cost is
tenable?
40. LTHPPL has submitted that the capital cost has increased due to the following
reasons:
Delays in Forest and diversion approval
Geological Surprises
Earthquake in Sikkim
Substantial change in the interest rate environment
Increase in taxes, and increased demands under the Environment Mitigation
Plan
Increase in pre-operative expenses
41. LTHPPL has submitted that the above events could not have been foreseen by it at
the time of signing the PPA, and are beyond its reasonable control.
42. LTHPPL had appointed Tractebel as an independent Consultant to assess the
reasons for the increase in Project cost. According to the Report submitted by
Tractebel, the current assessment of Project cost is Rs. 5453.91 crore as against Rs.
MERC Order Case No. 105 of 2012 Page 27 of 29
2996.89 crore estimated in the DPR. Tractabel has attributed the increase in Project
cost to the following:
Major components of increase in Project cost as assessed by Tractebel
Reasons for increase Amount (in Rs. Cr.)
Geological Surprises 616.55
Increase in IDC 1492.56
Increase in Works Costs due to delay till December 2012 319.06
Price variation beyond December 2012 till competition 92.54
Financial Expenses, such as Margin Money, etc. 45.00
Increased Taxes and Duties 17.39
Sale of Infirm power (161.00)
43. The Commission notes that the highest increase is on account of increase in IDC
cost, which is a result of time over run. However, as per the contractual framework,
the change in capital cost would not lead to any change in the fixed Tariff of Rs.
2.32 per kWh for the first 25 years.
44. LTHPPL has submitted that, in view of the significant increase in the Project cost
and supervening events beyond the control of the LTHPPL, it has become
impossible for it to supply power at the Tariff contained in the PPA.
45. LTHPPL has cited Section 61 of the EA, 2003, and has highlighted that Section
86(4) requires the State Commissions to be guided by the National Electricity
Policy and Tariff policy. LTHPPL has quoted from the National Electricity Policy,
Tariff Policy and the EA, 2003 to emphasise reasonable recovery of cost. LTHPPL
has also referred to the Hydro Policy, 2008 and National Electricity Policy to
emphasise the importance of hydro projects.
46. LTHPPL has submitted that the huge investments made by it and its lenders would
be irreversibly lost if the Tariff is not revised. It cited the Judgment of ATE in the
case of Konark Power Projects Limited V/s. Karnataka Electricity Regulatory
Commission to emphasise the powers of the Regulatory Commissions to modify
the Tariff of a concluded PPA, even if there is no such provision in the PPA.
47. In the present case, Tractebel has assessed that the Project cost would increase to
Rs. 5453.91 crore, i.e, an increase of around 80%. Moreover, LTHPPL has
submitted that the Project is expected to be commissioned in March, 2017, three
years from now. The Project cost assessed by Tractebel is provisional, and there is
no certainty of the Project being completed without further time and cost over-runs.
MERC Order Case No. 105 of 2012 Page 28 of 29
48. While there are precedents for Electricity Regulatory Commissions revising the
Tariff of a concluded PPA, the Commission notes that, in case of LTHPPL’s
Teesta Project, the increase in Project cost will affect the Tariff over the entire
period of 25 years. It needs be ensured that consumers are not adversely impacted
by a decision with such long-term implications.
49. The Teesta Project is based on hydro power. The Commission notes that the
current operational hydro generating capacity available to the State is only around
4000 MW (including MSPGCL’s hydro capacity, Sardar Sarovar Project, Dodson
and Pench hydro Projects), which consitutes only around 20% of the contracted
capacity of MSEDCL. The Commission believes that there is a need to promote
access to hydro generation in the State. The ideal hydro:thermal mix, as per the
Hydro Power Policy, 2008, is 40:60.
50. It is in this background and considering the nature of the Project that the
Commission had asked the parties to enter into consultations, but they have not
been able to reach an agreement. MSEDCL has stated that it is interested in
procure power from the Project but cannot agree to a revision in Tariff since the
LTHPPL signed the PPA after considering all relevant factors affecting viability of
the Project. MSEDCL has argued that LTHPPL is bound to supply power as per
the PPA, and Tariff revision will not be in the larger public interest.
51. The Commission is of the view that, given the lack of certainty with regard to the
Project cost, commissioning date and other aspects, and the manner in which the
implementation of the Project has been progressing, it would be premature at this
stage to consider any revision of Tariff based on the actuals and projections made
so far even presuming that any such revision is otherwise tenable under the terms
of the PPA. that the Commission might would be do be such revision has the
agreement no relief can be provided at this point in time. However, LTHPPL may
approach the Commission once there is certainty on Project cost and at a date
closer to commissioning. The submission of MSEDCL would also be considered at
that point in time.
Commission’s Ruling
52. Under the PPA signed between the parties and considered by the Commission,
the Tariff for the first 25 years is fixed at Rs. 2.32 per kWh. The PPA also
provides that changes in Project cost would not lead to any revision in Tariff.
MERC Order Case No. 105 of 2012 Page 29 of 29
53. The Project cost and the commissioning schedule remain uncertain. At any
rate, such commissioning is expected only around three years from now. It
would, therefore, be premature to determine a revised Tariff, provisional or
otherwise, at this point in time, even assuming that it is tenable for the
Commission to do so in the circumstances and considering the clear provisions
of the PPA.
54. The Consultant’s Report on which the Petitioner has based his costs and
projection has been completed before June, 2013 for Project components
executed before December, 2012. According to the Report, the geological
surprises and slowdown started in September, 2011. The Commission is of the
view that the Report should be revised to reflect the current physical and
financial position. The Petitioner may approach the Commission once this is
done. However, the Commission makes it clear no presumption may be
drawn, from this Order, as to whether or not the Commission would find it
tenable to revise the Tariff taking into account increased Project costs even at
that time, considering the terms of the PPA.
The Petition of M/s Lanco Teesta Hydro Power Private Ltd. in Case No. 105 of 2012
stands disposed of accordingly.
Sd/- Sd/- Sd/-
(Azeez M. Khan) (Vijay L. Sonavane) (Chandra Iyengar)
Member Member Chairperson