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

3. 2  As per the Electricity Act 2003 under Section 61, CERC shall be guided by the National Electricity Policy and Tariff Policy for the purpose of specifying the terms and conditions for determination of tariff.  Government of India has still not finalised the National Electricity Policy and Tariff Policy.  It is perhaps in this context too early to deliberate on the concept paper. In view of the above it is felt that existing terms and conditions should continue for a further period of 3 years. Presentation of NHPC on Discussion paper on “Terms & Conditions of Tariff” effective from 01.04.2004

4. 3  The transmission and wheeling services should not be provided free.  The methodology proposed in para 2.3.3.4 for sharing of transmission / wheeling charges seems to be reasonable.  NHPC is of the opinion that the transmission / wheeling charges should be payable only by the importing utility and should not be shared / borne by the exporting utility / generator because of the prevailing gap between demand and supply. Issues relevant to transmission and wheeling of electricity (Para 2.3.3) Presentation of NHPC on Discussion paper on “Terms & Conditions of Tariff” effective from 01.04.2004

5. 4 Interest on Loan (Para 3.1.2.(i))  Interest on loan should be continued to be provided separately on actual basis as per existing system.  Besides, if short terms loans are raised to pay earlier term loans (if Depreciation & Advance Against Depreciation is not enough to provide funds for repayment of loans), then interest should be paid on these short term loans also. Presentation of NHPC on Discussion paper on “Terms & Conditions of Tariff” effective from 01.04.2004

6. 5 Rate of return (Para 3.2): The rate of return should be return on equity rather than the return on capital employed (ROCE) for the following reasons:- Debt : equity ratio is varying and has not yet stabilized to the proposed preferable level of 80:20. Clear basis for the determining the interest on debt portion is not available. Miscellaneous provision (0.5% proposed by the CERC) to cover the cost of FERV, income tax, fuel charges etc. is on adhoc basis and not based on any study. Presentation of NHPC on Discussion paper on “Terms & Conditions of Tariff” effective from 01.04.2004

7. 6 Contd…. Foreign exchange rate variation (FERV) depends on many national / international issues and any miscellaneous provision in ROCE to take care of FERV will be on adhoc basis and not based on any study. PLR is changing and has not yet stabilised and therefore ROCE approach will need revision on year to year basis and keeping it fixed for tariff period will be incorrect. Abnormal variation of PLR carries the risk and adhoc figure of + 5% variation in PLR for re-setting the tariff in that particular year, is also not reasonable / based on any study. Rate of return (Para 3.2): Presentation of NHPC on Discussion paper on “Terms & Conditions of Tariff” effective from 01.04.2004

8. 7  The return on equity is more dependant on mobilizing extra resources for Hydropower development and therefore the present concept of return on equity should continue.  The rate of return in Hydro Sector should be more as compared to others for attracting more investments in this sector.  The present system of 16% return on equity i.e. post tax return of 16% p.a. should at least continue. Rate of return (Para 3.2): Contd…. Presentation of NHPC on Discussion paper on “Terms & Conditions of Tariff” effective from 01.04.2004

9. 8  Determination of rate base in case of return on equity (ROE) is simple and easy and is the equity base whereas in case of ROCE determination of rate base is more complicated and cumbersome.  Depending upon the balance sheet for the rate base is not appropriate due to the following reasons: Capital cost is provisional and may be inclusive of certain provisions for payment to the contractors. Certain payments are required to be made to the contractor on the basis of the arbitration award etc. which are known only at the later date and are not included in the capital cost. Rate Base (Para 3.3) Presentation of NHPC on Discussion paper on “Terms & Conditions of Tariff” effective from 01.04.2004

10. 9  Tariff should have provision for revision due to above expenditures. At present the revision of tariff is not allowed if expenditure upto 20% of capital cost is incurred during the tariff period.  This ceiling limit on capital expenditure should be removed. Contd…. Rate Base (Para 3.3) Presentation of NHPC on Discussion paper on “Terms & Conditions of Tariff” effective from 01.04.2004 In many cases, only essential systems and services, immediately required for operation of the stations are completed upto COD. Certain works remain pending and hence are not reflected in the capital cost.

11. 10  In case of NHPC, FERV was initially being paid as per option - (i) Given in Discussed paper which was subsequently changed to option No. (ii) / (iii) as per CERC orders.  The financial implications on tariff arising on account of change in the methodology for working out FERV should be computed for any project from the commercial operation date (COD) and any under or over payment should be adjusted in that particular year in which the change in methodology is proposed.  The existing rate base is on Gross Fixed Assets (GFA) concept and same should be continued. FERV Payment (Para 3.3.6.5): Presentation of NHPC on Discussion paper on “Terms & Conditions of Tariff” effective from 01.04.2004

12. 11  The existing system should continue.  However, consequent upon introduction of revised AS-11 effective from 01.04.2004, the ERV on repayment of principle amount are to be charged to P&L account instead of adjustment in carrying cost of relevant fixed assets as per existing AS-11.  The revised AS–11 needs to be taken into consideration in order to avoid any confusion on the issue of ERV. Contd…. FERV Payment (Para 3.3.6.5): Presentation of NHPC on Discussion paper on “Terms & Conditions of Tariff” effective from 01.04.2004

13. 12  The miscellaneous provision of 0.5% to take care of income tax proposed in the discussion paper is not based on any study and the amount of income tax varies from year to year and is not constant and therefore could not be considered as 0.5% for this purpose.  The existing system to continue with maintenance spares taken as 1% of capital cost in case of new projects.  Maintenance spares should be taken on the basis of five years average consumption in case of old projects. Interest on working capital (Para 3.4): Presentation of NHPC on Discussion paper on “Terms & Conditions of Tariff” effective from 01.04.2004

14. 13  The present method of working out the O&M cost i.e. normative for new projects and average expenses duly escalated, for the old projects, is reasonable.  The normative O&M expenses for old projects based on historical cost of project would not be correct and would be insufficient keeping in view the high material, employees cost etc.  The normative O&M expenses on the basis of option B given in paper (Para 3.5.9) is not reasonable because the Hydro projects are tailor made and any two projects of same capacity (MW) are not identical as far as O&M expenses are concerned.  The O&M expenses depend on the location of dam, weir, powerhouse, employees colony, topography and other related matters. Contd…. Operation and Maintenance cost (Para 3.5) Presentation of NHPC on Discussion paper on “Terms & Conditions of Tariff” effective from 01.04.2004

15. 14  The discussion paper proposes that in case of Hydro stations, the benchmark values may have to be specified for the following categories of stations (Para 3.5.14). Contd… Operation and Maintenance cost (Para 3.5) Presentation of NHPC on Discussion paper on “Terms & Conditions of Tariff” effective from 01.04.2004 Purely run of the river stations. Run of the river with pondage type of stations. Storage type of stations.

16. 15 NHPC feels that the bench mark value is not dependant on the type of stations as far as the O&M expenses are concerned but is dependant upon the following factors:- Lay out of the project. Location of the dam, plant, powerhouse etc. Location of the employees colonies. Topography of the area. Remoteness of the project. Law and order situation. Silt content in the water. Restriction imposed on the project design on account of international water treaty, if any. Contd… Operation and Maintenance cost (Para 3.5) Presentation of NHPC on Discussion paper on “Terms & Conditions of Tariff” effective from 01.04.2004

17. 16 Contd…  However, it is proposed that in case of new projects the O&M expenses should be taken as 2.5% of the capital cost. The escalation factor of 10% should be adopted for older projects because escalation in employees cost has always been much higher than the increase in escalation factor. Operation and Maintenance cost (Para 3.5) Presentation of NHPC on Discussion paper on “Terms & Conditions of Tariff” effective from 01.04.2004

18. 17  The amount of depreciation should cover the amount of repayment of loan during the year. Depreciation (Para 3.6) Presentation of NHPC on Discussion paper on “Terms & Conditions of Tariff” effective from 01.04.2004

19. 18  The rate of secondary energy should not be less than the rate of primary energy because then only the generator will be incentivised to generate additional secondary energy.  At the same time the beneficiary has not to pay the capacity charges on this secondary energy, therefore, this is always cheaper than primary energy for him. Pricing of secondary energy Operational Norms (Para 3.7.2) Presentation of NHPC on Discussion paper on “Terms & Conditions of Tariff” effective from 01.04.2004

20. 19 Incentive = Actual Peak Time Generation x Incentive Rate (Rs. / Kwh) x (CI A – CI N ) / 100  The above formula proposed in the discussion paper takes into account the actual peak time generation which is related to the actual capacity index and therefore having the factor of actual capacity index along with the actual peak time generation does not seem to be justified.  It is necessary that the peak hours are properly defined.  The proposed formula should be made applicable to the storage type and peaking type stations only  For the run of river stations, the existing formula for incentive should continue. Incentives for Hydro Stations (Para 3.8.2) Presentation of NHPC on Discussion paper on “Terms & Conditions of Tariff” effective from 01.04.2004

21. 20  The funds required for capacity addition are not to be mixed with the amount of depreciation and hence it should be separately dealt.  The total amount of depreciation recovered through tariff is limited to 90% of the cost of the project and by increasing the rate of depreciation the total amount of depreciation does not increase. Therefore, the additional fund should be made available over and above the depreciation amount by way of development surcharge for capacity addition. Development Surcharge (Para 3.9) Presentation of NHPC on Discussion paper on “Terms & Conditions of Tariff” effective from 01.04.2004

22. 21  Development surcharge collected from the sale of power by the generators should be utilised only for development of hydro sector, for improving hydro - thermal mix required for security and stability of the grid.  The existing system to continue and there should be freedom with utility for deployment of development surcharge fund in rated securities available in market. No rebate should be given on development surcharge amount. However late payment surcharge is to be levied. Development Surcharge (Para 3.9) Contd… Presentation of NHPC on Discussion paper on “Terms & Conditions of Tariff” effective from 01.04.2004

23. 22  NHPC feels that tariff period should be 5 years. Tariff Period (Para 4.1) Presentation of NHPC on Discussion paper on “Terms & Conditions of Tariff” effective from 01.04.2004

24. 23  Since the quality of end product i.e. power does not depend upon the project, from where it is generated, therefore NHPC feels that tariff should be only on regional basis for a generator. Regional Tariff (Para 4.2) Presentation of NHPC on Discussion paper on “Terms & Conditions of Tariff” effective from 01.04.2004

25. 24 oPeak and off-peak tariff should be introduced. oPeak tariff should not be more than double the off peak tariff. Peak and off peak tariff in Bulk Generation (Para 4.3) Presentation of NHPC on Discussion paper on “Terms & Conditions of Tariff” effective from 01.04.2004

26. 25  The amount for extra generation due to over - loading of machines should be over and above the Annual Fixed Charges (AFC) paid to the generator.  Declared capability of the generator should be exclusive of over-loading capacity of the machine because declared capability is on continuous basis whereas over-loading of machine will depend upon various technical parameters / limits prescribed by the manufacturer. Declared Capacity (Para 4.4) Presentation of NHPC on Discussion paper on “Terms & Conditions of Tariff” effective from 01.04.2004

27. 26 The following additional issues may be considered i.The monthly capacity charges to be recovered should be proportionate to the design energy of that particular month and not in 12 monthly equal installments. ii.The unscheduled interchange (UI) rate needs to be reviewed as this rate was fixed somewhere in 1997-98. Contd…. Additional Issues Presentation of NHPC on Discussion paper on “Terms & Conditions of Tariff” effective from 01.04.2004

28. 27 THANKS