Before the MAHARASHTRA ELECTRICITY REGULATORY COMMISSION ... 58 42/Order_Case No 105 of 2012.pdf · Before the MAHARASHTRA ELECTRICITY REGULATORY COMMISSION ... 500 MW Teesta Hydro

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

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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


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


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.


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


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.


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.


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


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...


…. 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


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


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.


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


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


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


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.


(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:


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:


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:


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.


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


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?


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


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


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.


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.


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.


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.


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

Documents

Before the MAHARASHTRA ELECTRICITY REGULATORY COMMISSION ... 58 42/Order_Case No 105 of 2012.pdf · Before the MAHARASHTRA ELECTRICITY REGULATORY COMMISSION ... 500 MW Teesta Hydro