ANDHRA PRADESH ELECTRICITY REGULATORY COMMISSION

11-4-660, 4th & 5th floors, Singareni Bhavan, Red Hills, Hyderabad.

O.P.No. 539 / 2001.

Dated:13-12-2002

Present

Sri G.P.Rao, Chairman
Sri D.Lakshminarayana, Member

Between
APTRANSCO,
Vidyut Soudha, Khairtabad,
Hyderabad - 500 082

…Applicant

AND

M/s. BSES Andhra Power Limited,
(Formerly Snehalata Power Ltd.)
6-3-1090/A,
Rajbhavan Road, Somajiguda,
HYDERABAD-82                                               …to whom notice is given.

The Commission having considered the application of APTRANSCO to give consent to the Power Purchase Arrangement with M/s. BSES Andhra Power Ltd., (BAPL) and the written submissions of APTRANSCO and the material on record passed the following order in continuation of its earlier order dt:29.07.02.

O R D E R

Transmission Corporation of Andhra Pradesh Limited (APTRANSCO) under letter dt: 28.08.2001 sought the consent of the Commission for the Power Purchase Arrangement with M/s. BSES Andhra Pradesh Ltd. (BAPL), on the basis of an amendment agreement to the modified Power Purchase Agreement (PPA) dt: 31.03.97. Objections, suggestions and comments were invited from general public and other interested parties on the proposal. The Commission also held a public hearing on 16.01.2002. Taking into account the views of the members of the public, presentation by the Commission Staff and other interested stake holders, the Commission passed an order under O.P. No. 539 of 2001 dt: 29.07.2002. Under this order, the Commission listed a few key issues which required clarification or re-consideration by APTRANSCO. APTRANSCO was requested to examine the key issues and re-submit the PPA after meeting the requirements pointed out by the Commission and also after establishing the need for power from this project on the basis of the revised load forecast approved by the Commission.

2. APTRANSCO replied vide letters dated 2.11.2002, 5.11.2002, 22.11.2002, 5.12.2002 and 7.12.2002 along with the proposed further amendments to the above PPA.

3. Dealing with the issue of demand, APTRANSCO submitted that the BAPL Project is already completed and fits into the Power Procurement Plan in the following manner:

Unit I - FY 2002 (140 MW)
Unit II - FY 2003 (80 MW)

This is in consonance with the load forecast approved by the Commission under its order dt. 29-07-2002.

4. APTRANSCO has furnished replies for the key issues raised by the Commission in its earlier order. Each issue is discussed below after setting out the Commission's observations in the earlier order and APTRANSCO's response.

ISSUE 1: FUEL TIE-UP:

Commission's observation:

5. Till such time BAPL arranges a firm fuel tie up for natural gas, the tariffs shall be computed based on the price of natural gas prevailing on date. The natural gas price will be the ceiling for reimbursing the cost of alternative fuel.

APTRANCO response:

6. APTRANSCO noted that Gas Authority of India Ltd. (GAIL), who signed the Gas supply Agreement with BAPL, in a letter dt. 19.10.2002 stated "we also understand that most of the upcoming power plants for whom an aggregate of 7.05 MMSCMD of firm gas allocation has been made have not achieved financial closure and till such time any one of the upcoming gas based power plant commence gas drawl, gas supply to M/s BSES Andhra Power Limited, will be continued at its current level".

7. APTRANSCO agrees that if the date on which gas supply to any of the upcoming power projects commenced, BAPL has not obtained firm allocation, then the cost of fuel (for the purpose of reimbursing the variable cost) shall be equivalent to the price of natural gas as supplied by GAIL or any other supplier at the metering point, whichever is lower.

8. BAPL was reluctant to make a specific mention in the PPA that the drawing of gas would not be less than the present level of 7 lakh SCMD at any point of time. It is pointed out that the drawing of gas is less when the ambient temperature is high and grid frequency is low. Referring to a stipulated quantity of drawing of gas in the PPA will lead to erroneous conclusions and any conditions in PPA linked to the amount of drawing of gas will not only require a lot of data but also lead to avoidable disputes and contradictions.

9. APTRANSCO views that the proposed amendments to the definition of Cumulative energy & Article 3.3(a) address the concerns of the Commission.

Commission Analysis:

10. The average drawing of gas by BSES is around 7 lakh SCMD and this falls short of the necessary level of fuel to maintain a PLF 85% which is the threshold for fixed cost coverage. BAPL argues that the firm allocations of natural gas to existing IPPs are also not to the level of the agreed PLF, without any stipulation in their PPAs that the cost of alternative fuel will be limited to that of natural gas for the tariff computation in the event the gas supplied to them is less than their firm allocation. Such a stipulation, it is feared, might delay the financial closure of the project.

11. The PPA, as amended, provides natural gas as the primary fuel and naphtha or Low sulphur HSD or LNG and the like as alternate fuel. As the project has only a fallback fuel supply arrangement with GAIL, BAPL is exposed to the risk of using costlier alternative fuel when natural gas is not available. Hence the Commission is of the view that BAPL is only entitled to the price of Natural gas prevailing on date, which will be the ceiling for reimbursing the cost of alternative fuel. The Commission would thereby be allowing BAPL to operate with alternative fuel without a firm fuel tie-up, and at the same time protecting the interests of consumers from any adverse price effects.

12. BAPL has produced two letters dated 23.9.2002 and 19.10.2002 from GAIL which interalia mention as follows:

" We also understand that most of the upcoming power plants for whom an aggregate of 7.05 MMSCMD of gas allocation has been made have not achieved financial closure and till such time any one of the upcoming gas based power plant commence gas drawl, gas supply to M/s BSES Andhra Power will be continued at its current level".

13. According to GAIL, BAPL started drawing gas from December 2001. The average drawing by BAPL for the period is around 7 lakh SCMD. This is only part of the total requirement (helping in maintaining a PLF of about 70% only). The Natural gas availability for this project should at least sustain a PLF 85% which is the threshold for fixed cost coverage.

14. The fuel linkage for generation upto 100% is the responsibility of the BAPL, APTRANSCO can only assist BAPL in obtaining the same (clause 7.2(g) of the PPA). The use of alternative fuel is conceived when there is a shortfall in drawing the primary fuel, in the course of business, inspite of an established 100% fuel linkage. The developer cannot commence his business with a shortfall right from day one and pass on the high cost of alternative fuel to the purchaser. BAPL's argument that gas availability is less than 85% of the capacity for the other existing gas based projects is besides the point. The terms of PPA of those projects are probably different and in any event, the relevant PPAs were entered into and the projects commenced generation of power prior to the formation of the Commission. BAPL's view that drawing of gas depends not only on availability of gas but also on factors like ambient temperature and grid frequency, may be correct technically, but the Commission is more concerned with the consequences of using alternative costly fuel both for fixed cost coverage and supply of energy.

15. The present fall back Natural Gas Supply Agreement between BAPL and GAIL is only for a period of ten years, which implies that for the balance period of five years of the PPA, the Company has no fuel linkage from GAIL. However, there is a provision for extension of this period on mutual agreement. BAPL has now forwarded a Memorandum of Understanding between them and Reliance Industries Limited dated November 30, 2002 which provides for delivering 1.1 Mln SCMD to the project for a period of ten years or for such longer period as mutually agreed from the date of first delivery i.e. June 2004.

16. The Commission advises as follows:

a. BAPL is entitled to full fixed cost coverage if the supply of Natural gas is at a level adequate to maintain a PLF of 85%. When the supply of Natural gas is inadequate, the fixed cost coverage should be pro-rata reduced to that extent, but not below the PLF which can be achieved with the gas availability of 7 lakh SCMD as committed by GAIL.
b. If the date on which gas supply to any of the upcoming power projects commenced, BAPL has not obtained firm allocation, then the cost of alternative fuel shall be equivalent to the price of the natural gas as supplied by GAIL or any other supplier whichever is lower.
c. When BAPL arranges a firm fuel tie up (with 100% fuel linkage) for natural gas and generates power with alternative fuel, the tariff shall be computed based on the cost of the alternative fuel as decided by the fuel supply committee.
d. When BAPL obtains natural gas on a firm basis either from GAIL or any other source, but the fuel linkage is less than 100%, the cost of alternative fuel will be the price of natural gas as supplied by GAIL or the price of any other supplier whichever is lower.
e. Even though BAPL has provisions for extension both as per Natural Gas Supply Agreement with GAIL and the Memorandum of Agreement entered into with Reliance Industries Limited, if BAPL is unable to secure the firm fuel tie-up beyond the current term of fuel supply agreement/ MOU, then all the above conditions shall apply mutatis mutandis for the entire term of the PPA which may extend beyond the term of Natural Gas Supply Agreement with GAIL/ Memorandum of Understanding with Reliance Industries Limited for supply of Natural gas.

ISSUE 2 - FINANCIAL IMPACT ON THE AMENDMENTS OF THE PPA:

Commission's observation:

17. In its order, dated 29.7.2002, the Commission agreed to the amendment to clause 1.1(54) which deals with scheduled date of completion of the project. But the Commission left the decision of charging / waiver of liquidated damages to APTRANSCO. In the letter, dated 5.11.2002, APTRANSCO enclosed further amendments to this clause on account of shifting the scheduled date of completion of the first unit to 26.01.2002 and the second unit to 60 days from signing of the Amendment Agreement to the Modified PPA. The Commission enquired the reasons for stipulating a period reckoned from the date of signing of the agreement instead of a specific date as it was done earlier.

APTRANSCO response:

18. It was expected that Regulatory consent would be available by the end of October 2001 and BAPL would complete the installation of the second unit well ahead of 31.3.2002. According to APTRANSCO, BAPL found it difficult to complete the project, mustering finances and obtaining all the equipment for the second unit, in the absence of a Regulatory clearance. However, BAPL has agreed to complete the second unit within two months of signing the amendments after Regulatory clearance. APTRANSCO further informed that the second unit has now been in operation and the performance test was carried on 8.11.2002.

Commission Analysis:

19. In the proposed amendment, scheduled date of completion of the first unit is shifted from 30.9.2001 to 26.01.2002 and that of the second unit from 31.3.2002 to "60 days from the date of signing the Amendment Agreement to the Modified Power Purchase Agreement". Though it is not uncommon to link the project completion date with the date of the signing of PPA, an amendment at this stage when the project is in operation should not alter BAPL's liability in the matter of payment of liquidated damages on account of its own default. While agreeing for this amendment, the Commission reiterates its earlier decision regarding charging/ waiving of liquidated damages by APTRANSCO. The commission wants to be certain that the present amendment should not disable APTRANSCO in the matter of charging/ waiving liquidated damages.

ISSUE 3 - DISPATCH INSTRUCTIONS:

Commission's observation:

20. Though APTRNSCO is confident of following the merit order dispatch, the PPA provisions do not reflect the same. The Commission directed APTRANSCO to modify clause 3.4 of schedule D in the PPA so that BAPL can follow the merit order dispatch as required by the system operator.

APTRANSCO response:

21. BAPL agreed to increase the number of dispatch instructions from one to two per day. Subsequently, BAPL also agreed to modify the existing limit (for backing down) of 1200 hours in any tariff year to stipulate that 'excluding the duration of any Despatch instruction requiring the Company to operate the project at a gross generating capacity between 100% to 85% of the Project's Installed capacity the total hours of backing down shall not exceed one thousand (1000) hours in any Tariff year'.

Commission's Analysis:

22. The existing provision of 1200 hours in a tariff year as the aggregate duration of backing down and restricting the number of instructions to only one, afford the operator limited flexibility. The Commission desired that the system operator should have more flexibility in dispatching energy under the merit order.

23. The present amendment suggested by BAPL apart from increasing the number of dispatch instructions to two, provides the desired flexibility in two stages as under:

(i) For a gross generating capacity between 85% to 100% - a back down limit of a maximum of 280 MUs in a year.
(ii) For capacity between from 60% to 85% - Maximum limit for backing down of 1000 hours in a year.

This has provided more flexibility to the system operator than the previous provision of 1200 hours in a tariff year.

24. This negotiated position is acceptable to the Commission.

ISSUE 4 - ESCROW ACCOUNT:

Commission's observation

25. The Commission observed that there is no need to provide escrow facility after the formation of the Regulatory Commission as the tariffs are computed to allow the utilities a full cost recovery and the developer need not be apprehensive about recovery of the cost of power supplied. Hence this clause can be deleted.

APTRANSCO response:

26. According to APTRANSCO, BAPL is not agreeable for deletion of escrow clause but is willing to consider a lesser limit for escrow coverage. It has agreed to limit the escrow cover to debt servicing payable by BAPL in the immediately following billing month and one month energy charge based on a generation equal to a PLF of 100%. This is definitely an improvement over the earlier provisions of the PPA. The earlier escrow cover was 120% of one month's capacity charge and one month energy charge based on a generation equal to a PLF of 100%.

Commission Analysis:

27. APTRANSCO has set out (vide its letter dated 16.11.2002) its escrow cover/ policy as under:

"APTRANSCO policy: The present PPAs for Coal Projects provide for Escrow cover for 100% average monthly bill and Gas Projects provide for 120% of the monthly bill. APTRANSCO would like to restrict this amount to debt servicing plus variable charges per month. However, during informal interaction with the Indian Financial Institutions (IFIs) who are funding all the new Projects, the IFIs insisted for at least coverage of 100% average monthly bill. In order to go ahead with the implementation of the Projects, APTRANSCO has no other go but to accept the demand of IFIs insisting for 100% average monthly bill. The original PPAs provide for depositing of amounts equal to one month's average monthly bill/120% of average monthly bill in the Escrow Account to be funded with revenues from payments due to the Board from customers comprising one or more circles/areas used by the Board for its administrative convenience. However, since the DISCOMs have been formed and they are separate licensees, the revenue flow to APTRANSCO is mainly from DISCOMs through Bulk Supply Tariff (BST) and hence the Escrow funding can be done through the APTRANSCO revenues".

28. The Commission takes note of the fact that in order to go ahead with the implementation of the Projects APTRANSCO has no other go but to accept the demand of Indian Financial Institutions (IFIs) insisting on an escrow cover of 100% average monthly bill and APTRANSCO's assurance that it can fulfill the condition of the PPA in providing Escrow account to all the Projects included in the Power Procurement Plan.

29. It is seen that the present provisions in the PPA are on the basis of providing particular circle revenues as Escrow. These provisions have to be recast on the basis of the present stand of APTRANSCO that Escrow would be provided from out of the revenues of APTRANSCO.

ISSUE 5 - ASSIGNMENT:

30. The Commission suggested draft language for Assignment in the PPA to take care of Multi-Buyer Multi-Seller (MBMS) scenario, which could be suitably inserted in clause 15.3 of the PPA.

31. Both APTRANSCO and BAPL have agreed to incorporate the wording as per the Commission's suggestion.

CONCLUSION:

32. Pursuant to Commission's order dated 29.7.2002, the following are the positive developments in the negotiations between BAPL and APTRANSCO:

(1) The clause corresponding to dispatch instructions is modified so that there is greater flexibility to the system operator than the earlier provisions in the PPA.
(2) APTRANSCO has outlined an escrow policy, by which the escrow cover is reduced and is provided only out of the revenues of APTRANSCO.
(3) The assignment clause as proposed by the Commission is agreed to by APTRANSCO and BAPL.

33. But on fuel supply, BAPL could get only comfort letters from the fuel supplier which only partially address the Commission's concern on the existing 'fall back' arrangement for fuel supply.

34. The Commission can consider granting consent to this PPA after APTRANSCO and BAPL agree to Commission's views in para-16 of this order on fuel-tie up with consequent changes in the PPA in this area as well as in the areas where it is already agreed that modifications are called for.

This order is issued by the A. P. Electricity Regulatory Commission on 13th December, 2002.

Sd/

Sd/

D. LAKSHMINARAYANA

G.P. RAO

MEMBER

CHAIRMAN