WELCOME TO APGENCO’S PRESENTATION ON CERC’S DISCUSSION PAPER JUNE-03 ON

1. WELCOME TO APGENCO’S PRESENTATION ON CERC’S DISCUSSION PAPER JUNE-03 ON TERMS & CONDITIONS OF TARIFF (Commencing 01.04.04) by V.V.RAO, IDAS DIRECTOR/ COMMERCIAL APGENCO.

2. GENERAL • The consumer interests are better protected if his growing needs for power in future are well recognized right now and simultaneously progress the new capacities at most optimal cost. The tariff structure therefore must aim at notleast cost alone but equally important, provide timely capacity additions too. • The CERC tariff shall firmly enable not only retention of RoE / Incentive by the State Gencos but also consistent capacity additions in a planned/ phased manner. • CERC Tariff guidelines in respect of CGS shall automatically extend and uniformly apply to all the State Gencos also and pertinently to all IPPs without discrimination. • In view of several structural changes – either already in place or in the offing – the PPAs concluded with IPPs in the pre-regulatory regime shall have to be revisited by the Commissions concerned so that a level playing field with the State & Central Generators is ensured.

3. GENERALContd.. • All State Gencos must be allowed to operate under a single PPA without insisting on Station-wise PPAs. Variable Charges can be station-wise even under this dispensation. • Station vintage, obsolescence of technology and the past 3-year performance shall be the main criteria for prescribing operating parameters in respect of small capacity generating units (say 30-110 MW). • Non-tariff components – which are peculiar to the State Gencos – such as unfunded liabilities on account of Pension / PF etc. shall be entirely borne by the respective State Govts. only. • State Transcos shall contract the State Gencos’ capacity as well as energyin full whereby no such occasion presents for certain (already) built-up projects to get deleted/ rejected at a later date.

4. FIXED CHARGES – RoE & Depreciation • The existing return at 16 % on equity shall continue. • ROCE proposed by CERC needs a still clearer definition. As we understand, computation by liability side approach and asset side approach is not one and the same and none of these yields 16% return in later years of the project life at a dwindling rate. • If ROCE method only is to be adopted, Generator must therefore be assured of firmly getting at least an equivalent of 16% return on the equity portion throughout the project life on year-to-year basis. • RoE shall take into consideration the equity component of subsequent capitalisations on account of major R & M / life extensions, if any, on par with the original equity. • The capitalized expenses on major R&M/ life extension shall also be eligible for depreciation at the same rates. • The existing rates of accelerated depreciation @7.84% for thermal and 3.4% for hydel along with the provision for advance against depreciation may be retained.

5. Fixed charges – Interest on loans Interest on the outstanding loans shall be allowed at actuals, subject to… • The interest rate shall not exceed PLR plus a stipulated margin which is uniform. • Generating companies to renegotiate interest rates within these limits from time to time in case of falling interest rates. • In case of increase in interest rates during the course of repayment period, no additional liability shall be reckoned, since earlier negotiated rates of interest are normally operative for the entire term of the loan. • Interest will be reckoned on an year-to-year basis on outstanding loan. • Where a large number of projects are covered or different loans involved for the same project, the weighted average rate of interest shall apply.

6. Fixed Charges – O&M. • Based on the current capital cost/MW, to be declared each year by an Authority like CEA, O&M expenses shall be allowed @ 2.5% for new thermal projects and 1.5% for new hydel projects. • However, for old stations, this can be the average of past 3 years as per Audited Annual Accounts. There on, escalating once @ 10% yields base O&M and further escalating it annually @ 6% yields normative O&M for each year of the next tariff period.

7. FIXED CHARGES – Interest on Working Capital • The present composition of working capital elements does not call for a change. • Owing to the irregular and inadequate payments being received by the State Gencos, it is imperative that the 2-months receivables, as billed, shall continue to be the most essential working capital element. • Similarly, 1 month O&M also shall constitute the working capital.

8. FIXED CHARGES – IncentiveContd.. • Incentive shall be availability-linked in preference to the PLF and the target availability for reckoning incentive shall be 80% for thermal and 85% capacity index for hydel. • The current merit order scenario is not PLF-oriented and hence incentive must be distanced from PLF. • The level of thermal incentive shall be uniformly 21.5 Ps/Kwh (subject to 50% of fixed expenses) for availability in excess of 80% without any cap at 90%. • Hydel incentive as per Cl. 3.8.2.6 of the CERC’s Discussion Paper (p-46) of June-03 seems to be in order. Incentive rate may be specified by the Commission. There shall be no disincentive if Capacity Index falls short of the targeted 85% for reasons beyond the control of Generator. • Incentives shall be payable monthly based on availability/ capacity index for the month.

9. Recovery of Fixed Expenses (Thermal only)

10. Payment & Penal Interest Charges • Track record of payments being made to State Gencos is far from satisfactory. Unless payment covered under LC with penal provisions for delayed payment is ordered by the Commissions concerned, State Gencos continue to be in dire stress at the cost of their credibility as commercial entities. • Irrevocable revolving LCs covering one month dues shall therefore be opened by Transcos forthwith. • For delayed payments, penal surcharge shall be levied @ 2% p.m. on total outstandings from the start of the financial year.

11. Development Surcharge and other issues • Shall be on par with thermal and hydel CGS. • States have no less responsibility for ensuring adequate capacity additions. Together with RoE, Development Surcharge will also bring about necessary investments by the State Gencos for this purpose. • Development Surcharge shall be kept aside annually and ultimately utilized for no purposes other than capacity addition. • Hydel peaking power shall be accorded special tariff in addition to normal fixed charges. • Reactive power by condenser mode operation shall be on chargeable basis. • Sale of energy from the Non-conventional sources like mini-hydels and wind projects shall be allowable at special tariff for State Gencos on par with IPPs.

12. Merit Order Dispatch • Dispatch through Merit Order shall be on the basis of not only the station-wise variable charges but other system conditions also such as system stability, improvement of voltage profiles, reduction in transmission losses, congestion of transmission lines, avoided transmission cost etc. • Incentive shall not have any role in merit order dispatch for the simple reason that the incentive cannot be PLF-linked (connected to fuel charges) any longer but shall be Availability-linked (connected to fixed charges). • The existing practice of adding incentive, for merit order purpose, at a flat rate of 21.5 Ps/Kwh to each unit of station-wise variable charge for PLF (as long as cumulative PLF is over and above 77% is highly unjustified).

13. Merit Order DispatchContd… • Conceding, for argument sake, that the incentive is figuring in the merit order, the incentive that will be payable/ actually paid alone shall reflect even for merit order purposes and they cannot be independent of each other. • DI shall be such that no coal based unit is ever required to be operated at less than 80% of its installed capacity, subject to technical limits. • Backing down limits for each generating unit shall be clearly agreed upon depending on prudent technical practice subject to a maximum of 20% of respective installed capacity.

14. STATION OPERATING PARAMETERS

15. STATION OPERATING PARAMETERSContd… • The element of compensation for oil support during partial load operations (or unit startups due to DI) in the present ABT/ Merit Order regime shall be clearly defined by the Commission in terms of Xml/Kwh (in excess of 2.0 or 3.5) for every Y% of backing down beyond the agreed % of installed capacity for Z hours of backing down. • For hydel stations, which draw station supply from the grid through GTs in the absence of generation, limit for auxiliary consumption shall be enhanced from 1% to 1.5%.

16. Coal issues • Steep variations in price structure of coal within SCCL & MCL must be curbed and evolve a uniform coal pricing policy. Also, pricing of coal shall relate to million Kcal. • Serious grade slippage is taking place by 2-3 grades between the billed & actually tested at the station end. Consequently, Gencos are paying heavily to the coal supplier while collecting far less through variable charges. • Coal suppliers shall not escape their responsibility from joint collection/ testing of coal samples at station end also on continuous basis. UHV vs GCV relation cannot be established otherwise. • There by, the grading practice shall be rejected/ abolished eventually. • Coal suppliers only shall wash the coal and supply washed coal with 34% ash or less to the Generators. • Present coal linkage system shall ensure distant generating stations be linked with better quality coal mines such that quantum of coal purchased & transported are minimised, resulting in reduced specific coal consumption. • A coal/ transport Regulator is highly essential to bring about such vital changes discussed above.

17. Issues specific to APGENCO • Unfunded liabilities: • GoAP has decided to allocate to APGENCO only (not touching Transco & Discoms) an unfunded liability on account of pension & provident funds of all the erstwhile APSEB employees to an extent of Rs. 4617 Cr by way of enhancing the value of fixed assets by 4270.90 Cr. • The entire burden on APGENCO alone boosts its fixed cost. • The State Regulator expects APGENCO to meet the entire liability (repayment + interest) on year-to-year basis from the extra depreciation owing to enhanced asset value. • From the beginning, the understanding with the Govt. & reforming quarters is that this liability is going to be a solid tariff-pass through.

18. Issues specific to APGENCO • Unfunded liabilitiesContd… • On the contrary, together with another major liability in the shape of Vidyut bonds, the depreciation so allowed even with RoE included is not adequate to service these 3 liabilities on year-to-year basis. • APGENCO pleads the interest component only of these liabilities to be pass through in tariff, but this is not acceptable to Regulator. • APGENCO also pleads relegation of pension/ PF liability to the respective entities but this also is not acceptable to APTRANSCO. • In view of this, APGENCO pleads for total takeover of this unfunded liability by the Owner i.e. GoAP.

19. Issues specific to APGENCO Srisailam Left Bank Power House (SLBPH) 6*150 MW • Under the GoAP’s Transfer Scheme dt. Jan 99, the SLBPH, the unique under ground hydel station in AP, was inherited by APGENCO while in construction stage since late 80s. • APGENCO has since then progressively commissioned each of the six 150 MW units. The station is now fully operational in conventional mode, subject to hydrology. • Cost of the project is tentatively Rs.3340 Cr. • The widespread impression is that the GoAP had assumed major liability of the project for servicing from its funds and therefore the capital cost should be less. • This is to clarify that, in real terms, no liability was taken over by GoAP as such. All loans availed and interests accrued upto 31.01.99 were paid up i.e. adjusted against the subsidy payable by GoAP to APSEB as on that date. Hence there has been no remission of any of the loans and interests by GoAP.

20. Issues specific to APGENCO • (SLBPH)Contd… Project objectives are: • To tap surplus water to generate seasonal energy of 1000 to 1200 MU. • Operating together both the Left & Right Bank PHs in conventional mode with reduced load factor to meet higher system peak demand (1300 MU or more of peaking energy with 1500 MW capacity for varying in a year of normal hydrology) and • At a later stage, to resort to pump mode operation when the water availability gets reduced for conventional mode operation. • Efforts are already on for enabling pump mode operation with necessary river course correction at the best optimum cost considerations.

21. Issues specific to APGENCO • (SLBPH) Contd… • At this stage, the State Regulator considered it necessary to take this project out from the common PPA of APGENCO and ordered to earn its revenues on the basis of a separate PPA to be entered into. • APGENCO pleads for retention of SLBPH in common PPA only as the financial fall out on it in case of separation is devastating. • Or else, GoAP has to directly subsidise APGENCO on year-to-year basis to the extent of shortfall in revenue collection at a new tariff to be agreed upon with APTRANSCO who have already taken over a sizeable energy during last year and this year but paid nothing so far.

22. THANK YOU