Amendments to PPA between DISCOMs & M/s KPGL

Amendments to PPA between DISCOMs & M/s KPGL & M/s KPGL Claims on Additional Fixed Charges( I.A.No.5 of 2011 of O.P.No.11 of 2009) Suggestions/ Objections by K.Raghu Certified Energy Manager & Auditor 24-05-2011

Agenda Overview…

Agenda Claims of M/s KPGL on AFC- Ignoring the core issues • Para 4 of G.O.135: • “During the year 2007, M/s G.V.K. Extension and M/s Gautami Power Limited approached APPCC and requested to • permit them to sell 20% of PPA capacityplus any tested capacity over and above the PPA capacity to third parties to enable them • to recover the losses incurred by them due to non availability of natural gas by agreeing for deletion of alternate fuel provisions in the PPA dt.18.6.2003. • The APPCC has recommended the above requests for placing before the Committee.” • Para 5: Accordingly , based on the recommendations of the Committee, the Government conveyed the approval.

Agenda Claims of M/s KPGL on AFC- Ignoring the core issues • Para 9 of G.O.135: “ On the above, the Hon’ble APERC has made the following observations: • That the losssuffered by the IPPs due to non-availability of gas from the date of deemed COD upto April, 2009 should be commensurate with the benefits given in the model of proposed amendment.”

Agenda Claims of M/s KPGL on AFC- Ignoring the core issues • Thus the whole objective (from the point of view of IPP and DISCOMs) would be to achieve a balance, i.e. • Losses recovered by IPP = Benefits to Discoms due to Deletion of Alternate fuel clause. • This is the reason why IPPs have earlier agreed to be compensated only for part of their ‘stated losses’. • If there is no benefit to DISCOMS due to deletion of alternative fuel clause, there is no need for paying any Additional Fixed Charges to IPP.

Agenda Claims of M/s KPGL on AFC- Ignoring the core issues • Counsel for KPGL instead of focusing on how proposed deletion of alternate fuel clause would result in commensurate benefit to the DISCOMs, unnecessarily tried to play the blame game, which is of no use to the IPP. • If the mistake completely lies with DISCOMS, there was no reason for M/s KPGL to agree for deletion of alternative fuel clause.

Agenda Who should take fuel supply risk? There are many grounds to establish that fuel supply risk vests with IPP only: • No where in the PPA it is stated that Fuel risk shall be borne by the DISCOMS. • According to the Govt. of India, MoP resolution dt:06-11-1995 “ the responsibility of either indigenous or imported fuel linkage would be that of the IPP and any fuel supply risks would have to be shared between the IPP/Fuel supplier. The State Electricity Boards will not take any fuel supply risk.”

Agenda Who should take fuel supply risk? • The statement given by counsel for M/s KPGL that this resolution is applicable only for ‘Diesel Engine Generating (DG) units of reciprocating type’ is misleading. • B’cos, its only based on IPP request that the GoAP had accorded approval for change in technology from Open Diesel Cycle to Combined cycle gas turbine technology. (PPA preamble para 8, 9). • Moreover generator technology has got nothing to do with the fuel risk to be taken.

Agenda Who should take fuel supply risk? • 3. The APERC vide its Order dated 14.12.2004 stated, “Having given assurances about adequate supply of natural gas during the entire duration of PPA, the Commission expects that the developer shall make all reasonable efforts to ensure that uninterrupted supply of natural gas is available at least from 01-01-2007.” • From this also it is clear that the obligation on securing adequate supply of natural gas was on the developer, but not on the DISCOMs.

Agenda Who should take fuel supply risk? • 4. Cl. 7.2 (g) of PPA dt: 31-03-1997: • Board agrees to “make all reasonable efforts to assist the Company to obtain the issuance of the Fuel Linkage …………provided that the Scheduled Date of Completion of the last Unit and all prior dates for the Company’s performance hereunder shall be deemed to be extended day-for-day for each day of delay reckoned from 61st day in the issuance of the Fuel Linkage.” • But in the PPA dated 26th May 2003 Article 7.2 (g) is “Intentionally left blank”. • This means that KGPL did not want any ‘assistance’ in this regard.

Agenda Who should take fuel supply risk? • Various items listed under Article 7.2 refer to obligations of APTRANSCO (DISCOMs) under the PPA. These include inter connection facility, procurement of land and water, electricity for construction, start up, commissioning and testing, and GoAP’s Guarantees. • But this section did not include the obligation of APTRANSCO (DISCOMs) to secure fuel linkage.

Agenda Who should take fuel supply risk? • 5. Mixed Fuel Capability: It is learnt that, at present, all the 4 IPPs do not have generating capabilities with alternate fuels, and hence the question of ‘Alternate fuel risk’ does not arise at all.

Agenda Issues involved in estimation of AFC • Assessment of benefits due to deletion of alternate fuel clause: • without assessing the benefits to DISCOMs arising out of deletion of alternate fuel clause, it is not possible to arrive at AFC to be allowed to the IPP. • At present, there is no risk of use of alternate fuels in the foreseeable future.

Agenda Issues involved in estimation of AFC • If there is any shortage, DISCOMS are allowing IPPs to generate with RLNG, allowing actual costs, without pegging its cost to GAIL price (Commission gave consent for this amendment). • Moreover, IPPs do not have generating capabilities with alternate fuels. • Hence, there is no need to allow AFC.

Agenda Issues involved in estimation of AFC • 2. Changing claims of M/s KPGL: • There is no consistency in the claims made by M/s KPGL regarding the loss incurred to them due to non-availability of natural gas for declaration of COD. • Before Rosaiah committee: Rs 200.09 Cr • Before APERC during 80:20 case: Rs 413.47 cr • At the time of filing present affidavit: Rs 1062 cr ( 65ps/unit) • Revised estimate : Rs 1411 cr (70 ps/unit)

Agenda Issues involved in estimation of AFC • 3. Duration considered for the AFC: • M/s KPGL considered period from 01-06-06 to 30-06-2010 for assessment of AFC. • However, it is to be noted that M/s KPGL admitted 01-07-2007 as the notional COD, for the estimation of their losses, before the Rosaiah committee. • It also considered period after 01-02-2009 (when natural gas was available for declaration of COD) for the estimation of losses.

Agenda Issues involved in estimation of AFC • Delay in declaration of COD due to failure of Combined Cycle Generating unit can not be clubbed with the present case. • It is an issue involving ‘Forced Majeure’ claims by the IPP, to be decided separately.

Agenda Issues involved in estimation of AFC • 4. Duplication of Payments of Fixed Charges: • M/s KPCL estimated the loss to be Rs 1411 cr (incurred over 4 year period) to be recovered in 15 years (full term of the PPA), through AFC. • i.e. M/s KPCL will be paid normal fixed charges for entire 15 years and also ‘Foregone fixed charges’ it suffered for 4 years. • This amounts to payment of Fixed charges for 19 years beyond PPA term.

Agenda Issues involved in estimation of AFC • 5. Discounting Factor: • M/s KPGL considered a discounting factor of 12.45% against 10% considered before Rosaiah committee.

Agenda Issues involved in estimation of AFC • 6. Non-Execution of Alternate Fuel Capabilities: • M/s KPGL have not executed alternate fuel capabilities resulting in reduction in capital cost. • This will reduce Fixed cost obligation of DISCOMs for the entire PPA period. • This shall be factored into while estimating AFC.

Agenda Issues involved in estimation of AFC • 7. Components to be considered for estimation of AFC: • Counsel for M/s KPGL argued that ‘AFC’ is required ‘Not to make money but to service loans’. • Commission, if it decides to allow AFC, shall take into consideration only two factors: They are: • Cost of Rescheduling of loans • Loss of Interest on ROE • All other costs are recovered by the IPP during normal term of PPA.

Agenda Suggestions/Objections on Proposed Amendments • 1. Definition of Fuel (cl 1.1.27): • It is stated that Fuel means Natural gas only. • It is not clear whether ‘RLNG’ is also included in Fuel definition. • If RLNG is also covered under ‘Fuel’, then there is hardly any risk to IPP. • RLNG is very expensive and there is no scarcity of RLNG in the international market.

Agenda Suggestions/Objections on Proposed Amendments • Cl 3.3.(c) states that “ the Company, at its option, maintain multiple FSAs to meet its obligations under this agreement. Notwithstanding anything to the contrary contained in this agreement, all the obligations of the APDISCOMS under this agreement shall be limited to the Fuel quantity required to meet the obligations of the company under this agreement to operate the project to generate the energy corresponding to the installed capacity”

Agenda Suggestions/Objections on Proposed Amendments • Thus Discoms will be compelled to pay huge fixed costs, if they decide not to use RLNG for generation. • Effectively there is no mitigation of risk to Discoms due to deletion of alternate fuel clause. • Hence, RLNG shall not be included in the definition of fuel. • Generation based on RLNG shall be done only at the instance of DISCOMS, to avoid the any risk of huge fixed cost payments.

Agenda Suggestions/Objections on Proposed Amendments • 2. Reduction in fixed cost due to non-execution of alternate fuel capabilities: • There is no mention of reduction in fixed cost payable to IPP, due to non-execution of many facilities required for generation with alternate fuels. • It is requested that Fixed cost shall be suitably reduced corresponding to the reduction in capital cost.

Agenda Suggestions/Objections on Proposed Amendments • 2. Retention of alternate fuel facilities: • Deletion of alternate fuel is done to avoid fixed cost payments during backing down considering high cost of alternate fuel. • However deletion of alternate fuel clause need not result in deletion of alternate fuel capabilities. • In a shortage situations prevailing in the country, this can be used to take advantage of high UI charges during low frequencies.

Agenda Deletion of Review Powers of DISCOMS of Fuel Supply Agreements • Presently any Fuel Supply Agreement (FSA) entered by IPPs with fuel suppliers are submitted to DISCOMS for their approval. • This is done as per Cl. 3.3 of the PPA which states that “ APTRANSCO has the right to review and approve the Fuel Supply Agreement through the fuel supply committee in accordance with and subject to Schedule-I.”

Agenda Deletion of Review Powers of DISCOMS of Fuel Supply Agreements • Even the latest agreements of IPPs with GAIL for supply of R-LNG and agreement with RIL for supply of natural gas are submitted to DISCOMS for approval on the strength of this clause only. • Thus this clause is very important for DISCOMS to protect its own and consumers interests from the arbitrary actions of IPPs.

Agenda Deletion of Review Powers of DISCOMS of Fuel Supply Agreements • For ex: DISCOMS can reject option of using R-LNG if they felt that it is very expensive and does not fall in their merit order. • This can be done without paying any termination charges to Fuel Suppliers as approval of DISCOMS is sought before signing the FSA. • However deletion of this clause will give total freedom to IPP to chose the supplier of natural gas at whatever the cost.

Agenda Deletion of Review Powers of DISCOMS of Fuel Supply Agreements • DISCOMS in their reply to this objector have stated that ‘ operating plants are taking prior approval from the APPCC whenever gas price is increased by the gas supplier. The new IPPs also will follow the same principle.’ • It is not clear under which clause IPPs would seek the approval of DISCOMS of new/revised FSAs, once the existing clause providing for review of FSAs is deleted?

Agenda Deletion of Fuel Supply Committee • Deletion of FSC: • The existing PPA provides that ‘ in the event of purchase of natural gas from sources other than GAIL, the cost ‘C’ shall be the cost as per GAIL price or the cost of alternative fuel supplier whichever is less. • However if alternate fuel (Naphtha, HSD etc,.) is used, cost of fuel shall be as decided by the Fuel supply committee • Provided that the APTRANSCO has the right to review and approve the Fuel Supply Agreement through the FSC in accordance with and subject to Schedule-I.

Agenda Deletion of Fuel Supply Committee • DISCOMS in their reply have stated that • the fuel supply Committee was provided in PPA mainly for the purpose of alternate fuel. • Since alternate fuel provisions are deleted, the FSC has no significance. • Further, as it requires unanimous consent and chairman does not have any VETO power the purpose of FSC would not be meaningful.

Agenda Deletion of Fuel Supply Committee • The above assertions by DISCOMS are not correct • Schedule-I deals with both primary fuel as well as alternate fuel. • It clearly states that FSC shall act by unanimous agreement. • This implies that non acceptance of any decision will lead to ‘NO UNANIMITY’ and decision can not be enforced. • Thus it gives VETO power to DISCOMS in accepting or rejecting FSAs entered by the IPPs.

Agenda Deletion of Fuel Supply Committee • Infact para-3 of Schedule-I provides that • Tender documents for procurement of fuel shall be subjected to review and approval by the FSC • FSC shall review the bids received by the Company • FSC shall award the bid based upon consideration of the cost of fuel and the reliability, financial strength and the capabilities of the proposed fuel suppliers.

Agenda Deletion of Fuel Supply Committee • Thus there is a specific advantage to DISCOMS in retaining the FSC clause which also protects the interests of the consumers. • On the other hand deletion of FSC makes whole process of gas price determination arbitrary, vulnerable and highly disadvantageous to DISCOMS and consumers. • It is not clear why DISCOMS would like to forego all these rights which in no way harm the interests of IPPs.

Agenda Deletion of Fuel Supply Committee • Even if we presume that FSC is applicable only for the ‘alternate fuels’ and not primary fuel as stated by Discoms, retention of FSC clause with necessary changes, is all the more important. • This is because, earlier when natural gas was used from alternate sources, PPA provided for limiting the price to GAIL price. • However, if alternate fuels are used FSA will determine the price of Alternate fuels. • Thus there was regulation of price for both primary and alternate fuels.

Agenda Deletion of Fuel Supply Committee • Now Discoms propose to delete FSC clause altogether. • On the other hand Commission decided to delete the clause providing protection to consumers from arbitrary fixation of natural gas price from alternate sources of supply. • It will leave everything to the mercy of IPPs to decide and enter into FSAs with alternate gas suppliers.

Agenda Deletion of Fuel Supply Committee • The only new clause which is introduced to give some sort of protection to consumers is cl 3.11 which states that “The company agrees that it shall make best endeavours to seek a FSA comparable with other FSAs in the same area and available to similar consumers”. • The word ‘comparable’ will lead to many controversies in future between Discoms and IPPs. • Hence the clause FSC should be retained making it applicable for alternate gas sources ( This is in return for huge favour DISCOMS have done by deleting ceiling clause for alternate gas sources)

Agenda Deletion of Fuel Supply Committee • New Clause 3.11: • It states that “The company agrees that it shall make best endeavours to seek a FSA comparable with other FSAs in the same area and available to similar consumers”. • During earlier hearings DISCOMS assured that the price of alternate gas supplies would be as decided by the appropriate regulator, GOI etc,. • This is not incorporated now. • Hence Commission should ensure that suitable provisions are incorporated to avoid subjective interpretations at a later date.

Agenda Prayer • Commission is requested • Not to allow any Additional Fixed Charges to IPP as it will not result in commensurate benefit to Discoms/Consumers. • Allow amendments proposed taking into considerations concerns raised.

Agenda Thank you

Amendments to PPA between DISCOMs & M/s KPGL