GMR Group Discussion Paper on Terms and Conditions of Tariff November 12, 2003

GMR Group Objective of Tariff Norms Provide incentive for investors for realizing the “power for all” target –Tariff norms that reflect opportunity cost for a given business risk To reduce cost of generation in addition to reducing fixed cost –Reduce taxes –Reduce fuel cost

GMR Group Fixed Cost Recovery Fixed cost recovery should be different for coal and gas plants –Coal plants at [70% ] availability –Gas and liquid plants at [75%] availability

GMR Group Return on Equity The current guideline on Return on Equity of 16% may be continued –The ROE method has been in practice and well understood while ROCE method is complicated to implement –The ROE is linked to risk of business and not interest on debt –There is no return during construction (for 3-5 years) –Project finance debt interest rate is about 11% based on the type of project and risks etc. –Normative Debt: Equity at 70:30 may be continued –FE adjustment for both debt and equity –Interest as a “pass through” may be continued

GMR Group Interest on Working Capital Existing norms may be continued The Coal companies are demanding I (one) month L/C and I (one) month cash advance (equivalent to supply of coal) and the cost of L/C and cash advance should be included for the working capital norm

GMR Group Depreciation The existing norm of depreciation may be continued –Allows repayment of loans, tenors are usually for years for power projects –Provides cash for additional capacity –Advance against depreciation etc. would lead to micro-management by and burden on the Regulatory Commissions

GMR Group Operation and Maintenance (O&M) The current O&M norm of 2.5% of capital cost is low O&M norm should be different for coal (lignite) and gas (liquid) fuel plants O&M should escalate on the basis of WPI O&M should vary with age The suggested base O&M norm as % of capital cost as of COD: Type0-5 of COD> 5 of COD Coal (Lignite)2.5%3% Gas (Liquid Fuels)5%5.5%

GMR Group Other Operating Parameters Heat Rate –Heat Rate for coal Plants of 2500 Kcal/ kWh to be continued –Heat Rate for gas/ liquid fuel plants 2000 Kcal/ kWh (Combined Cycle) and 2900 kcal/ kWh (Open) Cycle may be continued Justified based on existing data Also need to account for load fluctuations, degradation (esp. in case of gas based plants), etc. –The condition “whichever is less” may be removed to incentivise operations to be efficient

GMR Group Other Operating Parameters Specific Fuel Oil Consumption and Auxiliary Energy Consumption –The existing norms may be continued –The condition “whichever is less” may be removed to incentivise operations to be efficient Incentive for higher availability –The existing norm may be continued

GMR Group Additional Points for Reducing Cost of Generation Reduction in taxes –Customs duty on capital goods import: 21.8% –Customs duty on spares: 50.8 –Sales taxes 12-16% –Taxes on fuel –Impact of taxes on capital cost (Base Cost : 100) Imported Content (60) Customs Duty = 60x22%= 13.2 Local Content (40) Sales tax =40X16%=6.4 Total increase in cost 20%

GMR Group Additional Points for Reducing Cost of Generation Reduction fuel cost –Fuel cost forms 40-50% of total cost –Fuel taxes Suggestions –Export parity pricing for liquid fuels –Cost of coal to be in line with international prices