CERC DISCUSSION PAPER ON TERMS AND CONDITIONS FOR TARIFF FROM 01.04.2004

1. CERC DISCUSSION PAPER ON TERMS AND CONDITIONS FOR TARIFF FROM 01.04.2004 WARM WELCOME TO THE PRESENTATION BY NEYVELI LIGNITE CORPORATION LTD., NEYVELI DATE:10.11.2003 PLACE: NEW DELHI

2. CAPACITY ON HAND & PRESENT STATUS TPS I : 6 X 50 MW + 3 X 100 MW AFTER LEP, MORE THAN 50% OF EXTENDED LIFE UTILISED. • TPS II : 3 x 210 MW + 4 x 210 MW • STAGE I – ALL UNITS CROSSED 1,00,000 HOURS OF OPERATION. LEP TO BE TAKEN IN THE NEXT FEW YEARS. • STAGE II – IN SERVICE FOR MORE THAN 10 YEARS • TPS I Expn. : 2 x 210 MW NEWLY COMMISSIONED STATION

3. THERMAL CAPACITY ADDITION PROGRAMME OF NLC

4. THERMAL PROJECTS UNDER FORMULATION

5. TARIFF SETTING PRIOR TO ERC ACT 1998 • SINGLE PART TARIFF SYSTEM • GOI NOTIFICATIONS TAKEN AS GUIDE LINE. • SEBs ARE COGNIZANT OF THE TECHNICAL CONSTRAINTS AND LIMITATIONS OF LIGNITE FIRED STATIONS OF NLC. • FINAL AGREEMENTS THROUGH EXTENSIVE DISCUSSIONS AND MUTUAL ACCEPTANCE OF NORMS AND PARAMETERS.

6. TECHNICAL CONSTRAINTS FACED IN OPERATION OF NLC POWER STATIONS • LIGNITE SOURCE FROM ONE TO ONE LINKED MINES - HENCE, PERFORMANCE OF POWER PLANTS DEPENDS ON PERFORMANCE OF MINES. • WIDE VARIATION IN LIGNITE QUALITY AFFECTS PERFORMANCE OF THERMAL UNITS. • CONTAMINANTS IN LIGNITE RESULT IN INCREASED FORCED OUTAGES AND LOW LOAD OPERATION OF THERMAL UNITS. • SLAGGING PROBLEMS ARE PRONOUNCED - AFFECT FULL LOAD OPERATION - LEAD TO OUTAGES. • BEING A LOW CALORIFIC VALUE FUEL, QUANTUM HANDLED PER DAY IS VERY HUGE.

7. TECHNICAL CONSTRAINTS FACED IN OPERATION OF NLC POWER STATIONS • LIGNITE IS ALREADY A HIGH MOISTURE FUEL; DURING RAINY SEASONS, LIGNITE BECOMES SLUSHY AND TRANSPORTATION POSES LOT OF PROBLEMS. • SLUSHY LIGNITE AFFECTS THE FURNACE STABILITY, WARRANTING USE OF FUEL OIL AND PART LOAD OPERATION. • FREQUENT LIGNITE MILL CHANGE OVER NECESSARY BECAUSE OF WEAR TO MILL PARTS DUE TO CONTAMINANTS IN LIGNITE. • SOME OF THE MEASURES TO OVERCOME THE FUEL RELATED PROBLEMS RESULT IN LOSS OF EFFICIENCY.

8. PERFORMANCE LEVELS OF NLC LIGNITE BASED UNITS • MAXIMUM POSSIBLE PLF LEVEL IS AROUND 80% ONLY. • THE ABOVE WAS ALSO POSSIBLE ONLY IN THE LAST TWO YEARS. • EVEN IN CASE OF SMALLER SIZED UNITS, THE PLF ACHIEVED COULD NOT BE MORE THAN 80%. • HIGHER FORCED OUTAGES AND LOWER DAILY OPERATING LOAD FACTOR (MAINLY BECAUSE OF FUEL) ARE THE PRIME REASONS.

9. PRINCIPLES FOR TARIFF SETTING • COST PLUS APPROACH, AS INDICATED IN THE DISCUSSION PAPER, IS TO BE CONTINUED . • NORMATIVE VALUES SHOULD BE FIXED IN A SUCH A WAY THAT THEY INCENTIVISE THE GENERATOR AND ALSO PROVIDE A LEVEL PLAYING FIELD. • NORMATIVE VALUES FOR TARIFF SHOULD NOT BE BENCHMARKED BASED ON BEST PERFORMANCE LEVELS AND THAT TOO COMPARED WITH OTHER FUELS. • THE EFFORTS TAKEN TO IMPROVE EFFICIENCY IS TO BE REWARDED; IMPROVEMENT OVER NORMS BY THE GENERATOR SHOULD NOT BE MADE AN IMPEDIMENT.

10. PRINCIPLES FOR TARIFF SETTING • RATE OF INCENTIVE AND RANGE OF PERFORMANCE FOR INCENTIVE SHOULD BE BASED ON TYPE OF FUEL / STATION SPECIFIC ISSUES. • NORMATIVE VALUES SHOULD BE SUCH THAT THE SAME ENABLE INVESTMENT FOR THE DEVELOPMENT OF THE POWER SECTOR. • IN CASE OF NLC, THE UNREQUISITIONING BY THE EBs, IF NOT LIMITED ON AN ANNUAL BASIS, MAY AFFECT THE FINANCIAL VIABILITY OF NLC. • THE NEW CHALLENGES POSED BY THE IMPLEMENTATION OF ABT AND THE ELECTRICITY ACT 2003 SHOULD ALSO BE TAKEN INTO CONSIDERATION WHILE FIXING THE TARIFF OF THE GENERATOR.

11. RATE OF RETURN • NLC RECOMMEND FOR CONSIDERATION COST OF EQUITY APPROACH. • AS PER EXISTING PRACTICE, INCOME TAX, FERV, ROYALTY ETC., TO BE REIMBURSED IN FULL. • DEBT-EQUITY RATIO AS APPROVED AT THE TIME OF GOI SANCTION FOR OLD PROJECTS AND 70:30 FOR NEW PROJECTS. • ROE TO BE RETAINED AT 16% POST TAX. • PLR PLUS SPREAD AS ALLOWED BY SBI TO BE ALLOWED FOR DEBT PORTION.

12. JUSTIFICATION FOR NLC PROPOSAL • PROJECTS ALREADY SANCTIONED SHOULD NOT SUFFER BECAUSE OF POLICY CHANGES. • WITH THE LESSER REMAINING LIFE OF OLD PROJECTS , THE 16% RETURN MAY NOT BE MUCH IN ABSOLUTE TERMS; THIS ALSO JUSTIFIES POST TAX RETURN. • ROE IS PREFERRED SINCE IN ROCE MODEL, RESTRICTIONS ON RETURN AS A FIXED %AGE ARE IMPOSED, DEVIATING FROM THE COST PLUS APPROACH.

13. RATE BASE • WHILE ARRIVING AT THE RATE BASE, NEW ADDITIONS / REPLACEMENTS SHALL ALSO BE ALLOWED IN FULL. • CEILING FOR INITIAL SPARES TO BE 5% OF CAPITAL COST. THE PRESENT PROVISION IS FOUND INADEQUATE TO ACQUIRE SPARES FOR TURBINE AND GENERATOR ROTORS. • FOR ADDITIONAL CAPITAL EXPENDITURE, THE CEILING OF 20% TO BE DISPENSED WITH SINCE MANY OF THE SYSTEMS / SERVICES ARE NORMALLY COMPLETED AFTER COD ONLY AND LAST 10% PAYMENTS RELEASED ONLY AFTER COMMISSIONING.

14. RATE BASE • ALL EXPENDITURE INCURRED DURING PROJECT EXECUTION LIKE WORKS OVER AND ABOVE SCOPE, DEFERRED EXPENDITURE IN ORIGINAL SCOPE ETC., ARE TO BE ALLOWED. • REIMBURSEMENT OF FERV IS TO BE AT ACTUAL. • LIABILITY SIDE APPROACH MAY BE CONSIDERED FOR ARRIVING AT THE RATE BASE TO ENSURE ADEQUATE AVAILABILITY OF RESOURCES, ESPECIALLY UNDER THE FAST CHANGING POWER SECTOR SCENARIO.

15. INTEREST ON WORKING CAPITAL • MARGIN MONEY TO BE PERMITTED AS PER THE REQUIREMENTS OF BANKING REGULATIONS. • O&M EXPENSES TO BE RETAINED IN THE WORKING CAPITAL AS BEFORE. THIS IS JUSTIFIED IN VIEW OF THE REBATE AVAILABLE FOR PROMPT PAYMENTS IN THE BPSA AND ALSO ADDITIONAL REBATES & INCENTIVES PROVIDED FOR IN THE SECURITISATION SCHEME. • INCLUSION OF INTEREST ON WORKING CAPITAL AS A %AGE PROVIDED FOR PASS THROUGH ITEMS NOT TO BE CONSIDERED; THIS SEEMS TO BE AGAINST THE COST PLUS APPROACH.

16. O&M EXPENSES • FOR OLD PLANTS, THE AVG.VAULE IS TO BE ESCALLATED BY 2.5 TIMES TO ARRIVE AT BASE YEAR O&M AS AGAINST 2 TIMES AS PER EARLIER CERC ORDER. • THE ESCALATION TO BE @10% INSTEAD OF 6%. • THIS IS NEEDED IN VIEW OF THE EVER ESCALATING COSTS OF MAINTENANCE. • THE AGEING OF THE UNITS AND THE INCREASED MAINTENANCE REQUIREMENTS ARE ALSO TO BE TAKEN INTO CONSIDERATION. • IN CASE OF NEW PLANTS, 3.5% OF CAPITAL COST IN VIEW OF FALLING COST OF POWER PLANTS

17. O&M EXPENSES • BENCH MARKING OF O&M EXPENSES MAY BE DIFFICULT • DUE TO DIFFERENT TECHNOLOGIES • DIFFERENT FUEL USAGE, SIZE OF THE UNIT • AGEING • EXTENT OF AUTOMATION • MAN POWER AND OTHER FACTORS • IT IS RECOMMENDED THAT THE O&M COST FOR THE NEW POWER STATIONS SHALL CONTINUE TO BE NORMATIVE PERCENTAGE OF CAPITAL COST.

18. DEPRECIATION • DEPRECIATION RATE TO BE MAINTAINED AT 7.84%. • THIS IS NECESSARY TO ENSURE ADEQUATE FUNDS FOR PROMPT DEBT SERVICING AND ADDITIONS / REPLACEMENTS. • RELATING DEPRECIATION TO THE ECONOMIC VALUE OF THE ASSET IS CONSIDERED NOT NECESSARY.

19. HEAT RATE • MUST BE ON A NORMATIVE BASIS ONLY. • CORRECTION FACTOR FOR MOISTURE FOR LIGNITE, AS ADOPTED BY CEA, SHALL CONTINUE TO BE FOLLOWED. • THE ALTERNATE REPORT OF EXPERT GROUP MAY BE CONSIDERED AS SUCH FOR ADOPTION. THIS WILL STILL BE RELEVANT.

20. SPECIFIC SECONDARY FUEL OIL CONSUMPTION • THE NORM SHOULD NOT BE LESS THAN 3.0 ML / KWHR BECAUSE OF 1. LIGNITE BEING A HIGH MOISTURE FUEL AND MINING BY OPEN CAST METHODOLOGY, USAGE OF OIL CANNOT BE PREDICTED AND WILL NOT REMAIN THE SAME ALWAYS. 2. CONSTANT LOAD OPERATION IS NO LONGER POSSIBLE UNDER ABT.

21. AUXILIARY POWER CONSUMPTION • ON NORMATIVE BASIS ONLY. • SHALL NOT BE LESS THAN 10% FOR THE FOLLOWING REASONS: • HIGH MOISTURE CONTENT AND ASSOCIATED HIGH VOLUME OF FLUE GASES. • OPERATION BELOW 100% MCR CONDITIONS FOR MOST OF THE TIME DUE TO TECHNICAL PROBLEMS, LIGNITE QUALITY ETC.,

22. INCENTIVE FOR THERMAL GENERATIONFIXATION OF NORMATIVE VALUE • TO BE BASED ON FUEL TYPE. • TO TAKE INTO ACCOUNT THE TECHNICAL PROBLEMS FACED. • TO CONSIDER RANGE OF PERFORMANCE AVAILABLE FOR INCENTIVE. • THE MAXIMUM PERFORMANCE LEVEL FOR EACH TYPE OF STATION WILL BE DIFFERENT • INCENTIVE RANGE GIVEN FOR COAL BASED TPS SHOULD BE EXTENED TO LIGNITE BASED TPS • ALL ABOVE FACTORS SHALL BE CONSIDERED AND EQUITABLE TO ALL TYPES OF GENERATORS.

23. INCENTIVE FOR THERMAL GENERATIONBASED ON AVAILABILITY OR SCHEDULED PLF • AS PER EARLIER CERC NOTIFICATION, THE SAME IS BASED ON SCHEDULED PLF. • PERFORMANCE LEVEL ABOVE SCHEDULED PLF DEPENDS UPON REQUISITIONING BY EBs. • THUS, INCENTIVE TO THE GENERATOR DEPENDS UPON THE SEBs RATHER THAN THE PERFORMANCE LEVEL OF THE GENERATOR. • ONLY APPROPRIATE IF THE INCENTIVE IS BASED ON AVAILABILITY OR DEEMED SCHEDULED PLF.

24. INCENTIVE FOR THERMAL GENERATIONRATE OF INCENTIVE • RATE OF INCENTIVE MAY BE SAME FOR ALL FUELS, PROVIDED DIFFERENT RANGE OF PERFORMANCE LEVELS OF DIFFERENT FUELS ARE CONSIDERED. • IN THE BPSAs WITH THE SEBs SO FAR, HIGHER RATE OF INCENTIVE FOR LIGNITE STATIONS WAS MUTUALLY AGREED. WHILE THERE IS SHARING OF BENEFITS BETWEEN GENERATOR & EB, 100% FIXED CHARGES PER KWHR IS ADOPTED AS THE RATE OF INCENTIVE. • IN CASE A FLAT RATE IS CONSIDERED, NLC SUGGEST FOR CONSIDERATION 50% OF FIXED CHARGES WITHOUT ANY CEILING OR THE UI RATE AT 50 Hz AS THE RATE OF INCENTIVE.

25. DEVELOPMENT SURCHARGE • DEPRECIATION RATE AT 7.84% APPEARS TO BE THE RIGHT SOLUTION. • DELETION OF SURCHARGE MAY BE CONSIDERED IN VIEW OF THE STRINGENT CONDITIONS STIPULATED FOR ITS USE.

26. TARIFF PERIOD NLC SUGGEST 5 YEAR TARIFF PERIOD FOR THE FOLLOWING REASONS: • LONGER DURATION WILL ENABLE STUDY OF EFFECTS OF VARIOUS POLICY DECISIONS FOR SUBSEQUENT FINE TUNING. • LONGER DURATION WILL ENSURE STABILITY AND ALSO ENABLE THE GENERATOR TO FINALISE THE BUSINESS STRATEGY. • PROCEDURE FOR TARIFF FINALISATION ENTAILS PROTRACTED DISCUSSIONS.

27. REGIONAL TARIFF • TARIFF TO BE STATION SPECIFIC. • NLC NOT AGREEABLE TO REGIONAL TARIFF.

28. PEAK AND OFF PEAK TARIFF • NLC SUGGEST CIRCULATION OF A DRAFT PROPOSAL SEPARATELY UNDER THE CHANGED SCENARIO WITH OPERATION OF THE GRID UNDER ABT.

29. DECLARATION OF CAPACITY EXCEEDING INSTALLED CAPACITY • NLC IS OF THE VIEW THAT THIS CAN BE PERMITTED. • AUXILIARY CONSUMPTION ALONE CANNOT BE A FACTOR FOR HIGHER INJECTION. • SO LONG THE ENERGY FED INTO THE GRID IS IN AID OF THE SAME, IT SHOULD BE PERMITTED.

30. UI RATE IN STEPS OF 0.01 Hz THIS IS SUGGESTED AS • THE FREQUENCY IS MEASURABLE IN STEPS OF 0.01 Hz. • THE ABOVE MEASURE WILL HELP BOTH THE GENERATOR AND EB.

31. TIME FOR REVISION OF FORCED OUTAGE • ANY FORCED OUTAGE IS TOTALLY UNINTENTIONAL AND OUT OF CONTROL. • OPERATING FREQUENCY IS GREATLY INFLUENCED BY THE SEBs ONLY. • SO, TOTAL DELETION OF THIS CLAUSE IS SUGGESTED FOR CONSIDERATION.

32. TIME FOR REVISION FOR OTHER REASONS • PRESENTLY, REVISION TO TAKE EFFECT FROM 6TH TIME BLOCK. • SUGGESTED TO EFFECT REVISION FROM 3RD TIME BLOCK. • REDUCTION IN TIME POSSIBLE AS ALL HAVE BECOME USED TO THE SCHEDULING PROCEDURES AND WITH THE USE OF ELECTRONIC FACILITIES.

33. NOTE UNDER “DEMONSTRATION OF DECLARED CAPABILITY • IT IS TO BE EXPLICITLY INDICATED THAT THIS IS APPLICABLE, IF AND ONLY IF, GAMING IS ESTABLISHED. • THIS MEASURE ALONE WILL MAKE THE UI SCHEME JUST AND EQUITABLE. • TREATING EVEN NORMAL VARIATIONS IN LOAD ABOVE DC AS GAMING IS NOT FAIR. • THIS NEEDS A CRITICAL REVIEW IN VIEW OF SEVERE FINANCIAL IMPLICATIONS TO GENERATORS.

34. Thank You