CERC Regulation Response PDF

Submissions on Draft Central Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations, 2024 By Power Grid Corporation of India Limited Comments on Draft CERC Tariff Regulations 2024-29 Contents 1. Chapter 1: Preliminary........................................................................................................3 1.1. Force Majeure......................................................................................................................................3 1.2. Implementation Agreement.................................................................................................................4 1.3. Operations & Maintenance Expenses................................................................................................4 1.4. Original Project Cost............................................................................................................................ 5 1.5. Rated Voltage....................................................................................................................................... 5 1.6. Reference Rate of Interest for Interest on Working Capital..............................................................6 1.7. Useful life..............................................................................................................................................6 1.8. Useful life of UNMS............................................................................................................................. 8 1.9. Useful life of Control & Protection:..................................................................................................... 8 1.10. Carrying Cost.....................................................................................................................................9 2. Chapter 3: Procedure for Tariff Determination..................................................................... 11 2.1. Application for determination of tariff................................................................................................ 11 2.2. Requirement of Management Certificate to be signed by Director of the Company..................... 14 2.3. Timeline for filing Truing up petition.................................................................................................. 15 2.4. Carrying cost for a new transmission system or element............................................................... 16 2.5. Determination of Tariff....................................................................................................................... 16 2.6. Interim tariff & variation in Projected Capital Expenditure............................................................... 17 2.7. Raising of Differential Bills................................................................................................................. 19 2.8. Revision in Tariff as a consequence of Orders in Review Petition or Judgment by APTEL/Higher Court........................................................................................................................................................... 21 2.9. In-principle Approval in Specific circumstances............................................................................... 21 2.10. Refund when actual additional capital expenditure falls short of the projected additional capital expenditure............................................................................................................................................... 22 3. Chapter 5: Capital Structure..............................................................................................24 3.1. Treatment of grant in Capital cost.................................................................................................... 24 4. Chapter 6: Computation of Capital Cost............................................................................. 25 4.1. Exclusions from capital cost..............................................................................................................25 4.2. Delay in Statutory Clearances.......................................................................................................... 26 4.3. Uncontrollable factors....................................................................................................................... 28 4.4. Initial Spares...................................................................................................................................... 29 5. Chapter 7: Computation of Additional Capital Expenditure................................................. 30 5.1. Treatment of Additional Capitalization for land lease renewal....................................................... 30 5.2. Additional Capitalisation within the original scope and after the cut-off date................................ 31 6. Chapter 8: Computation of Annual Fixed Cost.................................................................... 32 6.1. Norms for New Transmission Projects............................................................................................ 32 6.2. Return on Equity................................................................................................................................33 6.2.1. Maintenance of Existing Rate of Return on Equity................................................................33 Observations/Suggestions on Draft CERC (Terms and Condition of Tariff Regulation), 2024-29 1 6.2.2. Reduced Return on Equity on additional capitalization after cut-off date and beyond the original scope..................................................................................................................................... 40 6.3. Interest on loan capital for new assets............................................................................................. 41 6.4. Depreciation...................................................................................................................................... 42 6.4.1. Classification & Depreciation Rate for IT equipment and Software.....................................42 6.4.2. Classification & Depreciation Rate for IT equipment and Software.....................................43 6.4.3. Salvage value of “Building & Civil works” may be considered as NIL..................................44 6.4.4. Salvage value of “State Sector ULDC/ Communication Assets” may be considered as NIL.............................................................................................................................................................44 6.5. Operation & Maintenance Expenses................................................................................................45 Methodology to be considered for O&M norms................................................................................46 6.5.1. Consideration of consolidated POWERGRID O&M expenditure for deriving the O&M norms...................................................................................................................................................46 6.5.2. Normalization of more than 20% in POWERGRID O&M expenses..................................... 47 6.5.3. COVID Impact.......................................................................................................................... 47 6.5.4. Self-Insurance Reserves (SIS)............................................................................................... 48 6.5.5. Inclusion of Performance Related Pay...................................................................................49 6.5.6. Addition of expenditure on account of capital spares having cost between Rs 5 Lakhs to Rs 20 Lakhs........................................................................................................................................ 51 6.5.7. Separate norms for CTU expenses........................................................................................ 52 6.5.8. Allocation of normalized O&M expenses between substations and AC transmission lines at a ratio of 70:30................................................................................................................................ 53 6.5.9. Consideration of Average nos of bays, Ckt Kms for derivation of O&M norms................... 53 6.5.10. O&M norms for HVDC Back to Back (HVDC BTB) Stations.............................................. 54 6.5.11. O&M expenditure for new HVDC Bi-Pole Stations.............................................................. 55 Revisions required in sub clauses of Regulation 36 (3).................................................................. 56 6.5.12. O&M in hilly Regions............................................................................................................. 56 6.5.13. O&M Norms for SVC & STATCOM...................................................................................... 56 6.5.14. Communication System......................................................................................................... 57 6.5.15. Security Expenses and Capital Spares................................................................................58 6.5.16. Change in Law Event............................................................................................................. 59 6.5.17. Implementation of Wage or Pay Revision........................................................................... 60 6.5.18. O&M norms for HVDC bi-pole Transmission Lines............................................................. 61 Additional factors required to be considered for O&M norms.........................................................62 6.5.19. Capital Expenditure of Rs. 450 Crore for adoption of various digital tools in Asset Management:......................................................................................................................................62 6.5.20. Expenditure of Rs. 285 Cr for NTAMC Upgradation...........................................................62 6.5.21. Introduction of factor for Additional Manpower in O&M Norms..........................................64 7. chapter 12 : Norms of Operations...................................................................................... 65 7.1. Removal of upper cap of transmission system availability of 99.75% for claiming incentive in tariff.65 8. Appendix - IV: Procedure for Calculation of Transmission System Availability Factor for a Month............................................................................................................................ 67 8.1. Treatment of Outages........................................................................................................................ 67 8.2. Availability of the AC System- Formula........................................................................................... 68 8.3. Availability of the AC System- Weightage factor............................................................................ 69 8.4. Availability of the AC System- Deemed Availability........................................................................ 70 8.5. Availability of the AC System- Outages to be excluded.................................................................. 71 Observations/Suggestions on Draft CERC (Terms and Condition of Tariff Regulation), 2024-29 2 1. Chapter 1: Preliminary 1.1. Force Majeure Draft CERC Tariff Regulations, 2024 3(32) ‘Force Majeure’ for the purpose of these regulations means the event or circumstance or combination of event ……… (a) Act of God including lightning, drought, fire and……..or exceptionally adverse weather conditions which are in excess of the statistical measures for the last hundred years; or (b) Any act of war, invasion, …… (c) Industry wide strikes and labour disturbances having a nationwide impact in India; Our Comments/Suggestions The Hon’ble Commission has specified that any exceptionally adverse weather conditions which are in excess of the statistical measures for the last hundred years shall be considered as ‘Force Majeure’. The consideration of the statistical measures which are in excess of last hundred years will restrict the impact of several uncontrollable reasons like unprecedented heavy rainfalls in a particular region which adversely impacts the ability of the licensees to continue the ongoing construction or operation activities. Any reasonable events like this should be considered as Force majeure by Commission after prudence check. Therefore, it is requested that the Hon’ble Commission may either remove reference of last hundred years or specify it to a more realistic reference such as events which are in excess of 20- 30 % (as deemed appropriate) of average statistical measures of last 10 years. In addition to disturbances having nationwide impact, construction and operational activities are also disturbed on account of local agitation and disturbances. Therefore, Force Majeure clause should also cover local/ state/ region wide disturbances within its scope. Delay shall continue to be condoned after prudence check. Further, during the last control period, the world faced one of the largest global pandemics i.e. COVID19, and as a consequence all the business operations were impacted in one form or other. Keeping in mind that the pandemic not only impacts the construction activities but also operation activities, we would request the Hon’ble Commission to add ‘Pandemics’ as part of force majeure, as such events are clearly beyond the control of the utility and their impact could not have been avoided. If such events are considered in the Regulations, then separate notification by Government Authorities may not be required and delay on account of such Pandemics may be condoned automatically. Further, in today’s digital world the threat of Cyber Attack is increasing. System wide cyber-attack may be included as force majeure event by Hon’ble commission. Observations/Suggestions on Draft CERC (Terms and Condition of Tariff Regulation), 2024-29 3 1.2. Implementation Agreement Draft CERC Tariff Regulations, 2024 “3(40) ‘Implementation Agreement’ means any agreement or any covenant entered into (i) between the transmission licensee and the generating company or (ii) between transmission licensee and developer of the interconnected transmission system for the execution of generation and transmission projects in a coordinated manner, laying down the project implementation schedule and mechanism for monitoring the progress of the projects;” Our Comments/Suggestions The term ‘Implementation Agreement’ is not referred to or used anywhere in the proposed draft regulations. Therefore, it is proposed that the same may please be deleted. 1.3. Operations & Maintenance Expenses Draft CERC Tariff Regulations, 2024 3(56) ‘Operation and Maintenance Expenses’ or ‘O&M expenses' means the expenditure incurred for operation and maintenance of the project, or part thereof, and includes the expenditure on manpower, maintenance, repairs and maintenance spares, other spares of capital nature valuing less than Rs. 20 lakhs, additional capital expenditure of an individual asset costing up to Rs. 20 lakhs, consumables, insurance and overheads and fuel other than used for generation of electricity: Our Comments/Suggestions Definition of ‘O&M expenses’ proposes to include ‘additional capital expenditure of an individual asset costing up to Rs. 20 lakhs’ also as O&M. The same needs to be deleted because the replacement/refurbishment works in transmission systems are taken up under Additional capitalization in phased manner for old assets based on the criticality. Many of the equipment being replaced for system improvement are having values less than Rs. 20 Lakh. Further, Hon’ble Commission vide letter No. L-1/268/2022/CERC dated 01.08.2023 directed the thermal generating companies to submit the additional capitalization data wherein a detailed breakup of year-wise additional capitalization claimed and approved was sought from the generating company. However, similar details were not sought from Transmission Licensees. After reading para 15.6.23 of the explanatory memorandum, it is understood that the provision has been introduced in the regulations w.r.t. generating companies only. Therefore, it is requested that the additional capital expenditure of an individual asset costing up to Rs. 20 lakhs may not be considered under O&M for Transmission and the same may be continued to be allowed under Additional Capitalization as per relevant Observations/Suggestions on Draft CERC (Terms and Condition of Tariff Regulation), 2024-29 4 regulations. Therefore, definition of ‘Operation and Maintenance Expenses’ or ‘O&M expenses' may suitably be amended as below; 3(56) ‘Operation and Maintenance Expenses’ or ‘O&M expenses' means the expenditure incurred for operation and maintenance of the project, or part thereof, and includes the expenditure on manpower, maintenance, repairs and maintenance spares, other spares of capital nature valuing less than Rs. 20 lakhs, additional capital expenditure of an individual asset costing up to Rs. 20 lakhs except for Transmission projects, consumables, insurance and overheads and fuel other than used for generation of electricity: 1.4. Original Project Cost Draft CERC Tariff Regulations, 2024 3(57) 'Original Project Cost' means the capital expenditure incurred by the generating company or the transmission licensee, as the case may be, within the original scope of the project up to the cut-off date, and as admitted by the Commission; Our Comments/Suggestions Sometimes because of unavoidable circumstances, expenditure like Liability for works executed prior to the cut-off date or to meet award of arbitration, contract closing issues, court cases etc., some cost may be required to be incurred even after cutoff date. Regulation also provides for “Additional Capitalisation within the original scope and after the cut-off date” which is allowed by Hon’ble Commission after prudence check on case to case basis. In line with above, it is proposed that the word “up to the cut-off date” in the proposed definition of Original Project cost may be deleted. 1.5. Rated Voltage Draft CERC Tariff Regulations, 2024 3(66) 'Rated Voltage' means the voltage at which the transmission system is designed to operate and includes such lower voltage at which any transmission line is charged or for the time being charged, in consultation with long-term customers; Our Comments/Suggestions Considering high number of long-term customers, it may not be practically possible to consult all while deciding the aspects of operating the systems at lower voltage levels. It is proposed that in line with revised TBCB SBDs, wherein long-term customers have been replaced with CTU, the same may be replaced with ‘CTUIL’ in the subject definition as below; 3(66) 'Rated Voltage' means the voltage at which the transmission system is designed to operate and includes such lower voltage at which any transmission line is charged or for the time being charged, in consultation with long-term customers CTUIL; Observations/Suggestions on Draft CERC (Terms and Condition of Tariff Regulation), 2024-29 5 1.6. Reference Rate of Interest for Interest on Working Capital Draft CERC Tariff Regulations, 2024 (67) 'Reference Rate of Interest' means the one year marginal cost of funds based lending rate (MCLR) of the State Bank of India (SBI) issued from time to time plus 325 basis points; Our Comments/Suggestions Under MoP LPS Rules, 2022, total trade receivables outstanding as on 03.06.2022 were converted into EMI’s of 12 /28 /40 /48 instalments as availed by Discoms. This provided relief to Discoms as well as resulted in clearance of outstanding dues of Generating Companies and Transmission Licensees. Surcharge was also waived-off during the instalment period. In view of above working capital requirements of Licensees have increased. Therefore, existing Interest on Working Capital (IOWC) Rate of SBI MCLR+350 basis points may be continued by the Hon’ble commission., Therefore the subject definition may be modified as below; (67) 'Reference Rate of Interest' means the one year marginal cost of funds based lending rate (MCLR) of the State Bank of India (SBI) issued from time to time plus 325 350 basis points; 1.7. Useful life Draft CERC Tariff Regulations, 2024 3(88) 'Useful Life' in relation to a unit of a generating station, integrated mines, transmission system and communication system from the date of commercial operation shall mean the following: (a) Coal/Lignite based thermal generating station 25 years ………….. (f) Transmission line (including HVAC & HVDC) & OPGW 35 years Our Comments/Suggestions OPGW is generally part of individual communication networks or communication media and hence it is an integral part of the Communication System and its characteristics are entirely different from Transmission line. Definition of communication system given in CERC Communication Regulation 2017 includes communication media as its part. The definition of the ‘Communication System’ in the Communication Regulation 2017 is given as: Observations/Suggestions on Draft CERC (Terms and Condition of Tariff Regulation), 2024-29 6 “Communication system” is a collection of individual communication networks, communication media, relaying stations, tributary stations, terminal equipment usually capable of inter-connection and inter-operation to form an integrated communication backbone for power sector. It also includes existing communication system of Inter State Transmission System, Satellite and Radio Communication System and their auxiliary power supply system, etc. used for regulation of inter-State and intra-State transmission of electricity;” The life of OPGW as part of Communication System in the Tariff Regulation 2019-24 was defined as 15 years with annual depreciation of 6.33%. Accordingly, tariff for OPGW portion was determined considering useful life as 15 years. However, in the proposed Tariff Regulation 2024-29, the useful life of OPGW has been defined as 35 years (as part of transmission line) with annual depreciation of 5.28% for existing and 4.22% for new projects. In this regard, it is to mention that life of OPGW usually lasts between 15 to 20 years. It was observed in the previous years that the performance of fibers of OPGW deteriorated significantly in 15 years. Large nos. of OPGW links installed during period from 2002 to 2006 under various projects implemented by POWERGRID are not serviceable as these links are rusted and also showing high signal and data losses (called as attenuation) in data transmission. Accordingly, POWERGRID had approached respective Regional Power Committees (RPCs) for approval for replacement of 41 nos. of OPGW links for smooth functioning of Inter-State communication system presenting the supporting data regarding data losses on these links. On approval by respective RPCs, POWERGRID has implemented/ is implementing OPGW replacement in above 41 links across India. Recently in 2023, replacement of additional 03 nos. OPGW links has been approved by National Committee on Transmission (NCT) subsequent to approval in NRPC as old OPGW was rusted and losses in OPGW was very high. In addition, a list of 32 more OPGW links (implemented in 2004 and 2005) has been forwarded to CTU for replacement as data transmission losses on these links are high. Loss details fetched from NMS (Network Management System) are also attached. List of above links are attached as Annexure-A. In view of the same, it is suggested to keep the useful life of the OPGW unchanged i.e. 15 years as the fibers degrade early and cannot be matched with the life of line. This offers the flexibility for replacement on need basis. Therefore, it is requested that the depreciation rates for OPGW, provided under Appendix -I & Appendix -II, may be retained as 6.33% similar to as being provided under Tariff Regulations,2019. Observations/Suggestions on Draft CERC (Terms and Condition of Tariff Regulation), 2024-29 7 1.8. Useful life of UNMS Draft CERC Tariff Regulations, 2024 Useful life for U-NMS projects has not been provided in the proposed draft Tariff Regulations. Our Comments/Suggestions Hon’ble Commission vide order dated 15.12.2022 in petition no 728/MP/2020 has already allowed depreciation rate at 15% similar to Communication system which translates to useful life of 7 years. In line with this similar useful life of 07 years may be provided for UNMS projects with annual depreciation rate as 15% of capital cost. Further, UNMS System consists primarily of Semiconductor and Electronic devices and has following components: a. Servers and Software for UNMS Application b. Servers and Software for Storage System c. Hardware of Networking Equipment. d. Other accessories such as consoles etc. All such Semiconductor and Electronic devices have no Salvage or residual value. Rather, cost is incurred in disposing of such equipment. Therefore, 100 % depreciation may also be allowed for UNMS System. Further, on the same line for URTDSM and SCADA/ Energy Management System (EMS), depreciation rate at 15% may be allowed similar to Communication system which translates to useful life of 7 years. 1.9. Useful life of Control & Protection: Draft CERC Tariff Regulations, 2024 Useful life for Control & Protection has not been provided separately in the proposed draft Tariff Regulations. Our Comments/Suggestions Major part of the control & protection of HVAC, HVDC & FACTS stations are electronic type and software based, which gets obsolete within a period of 10 years due to fast changes /development in electronics and software technology. Various manufacturers keep on upgrading the hardware and software platform with new technologies. In view of the fast-paced technological advancements, old models are being declared obsolete within 10-12 years of age. Some of the benefits seen in new relays are: Observations/Suggestions on Draft CERC (Terms and Condition of Tariff Regulation), 2024-29 8 i. Improved selectivity of protection relays. ii. Faster operating times. iii. Improved cyber security measures iv. Better fault analysis capabilities. As per CIGRE Technical Brochure (TB) No. 649 “Guidelines for Life Extension of Existing HVDC Systems” by working group (WG)- 4.54, lifetime of HVDC Digital Control System is 12-15 years. Control & protection of FACTS are same as HVDC station and faces similar issues of obsolescence in C&P System. The cost of Control & Protection in HVDC & FACTS system is considerably high. Further the protection relays in AC substations experience major challenges due to differences in the technical life and regulatory life. For optimum utilization (Better reliability and availability) of HVAC, HVDC & FACTS system, it is proposed to keep the useful life of Control & Protection System separate from the useful life of Sub-stations. Based on above discussion, international experience of utilities, guidelines of CIGRE W.G. 4.54 and POWERGRID experience of O&M of HVAC, HVDC & FACTS systems, useful life of Control & Protections (C&P) of these systems may be defined as 12 years in the interest of timely upgradation/ replacement of obsolete systems for reliable & secure Grid operation. Further, as stated at para 1.7 above, considering that the Control & Protection equipment is majorly Semiconductor and Electronic devices and thus have no Salvage or residual value. Rather, cost is incurred in disposing of such equipment. Therefore, 100 % depreciation may also be allowed for Control & Protection equipment also. 1.10. Carrying Cost Draft CERC Tariff Regulations, 2024 No Definition provided Our Comments/Suggestions The term ‘Carrying Cost’ is used at multiple places in the draft Regulations. The Hon’ble Commission has already proposed the rate of Carrying Cost i.e., 1-year SBI MCLR as on 1st April of relevant year plus 100 basis points at various clauses of the draft Tariff Regulations. However, at Regulation 9 (5) the carrying cost is not provided. Further, provisions for carrying costs are provided for specific cases i.e from COD to interim order, difference in interim tariff to final tariff, Difference in tariff determined in true up Petition from previous order etc. However, apart from conditions envisaged in draft Regulations, there can be other cases where carrying cost may be required such as in certain cases where approved Tariff order is challenged in CERC or APTEL / Any other court, and either tariff or sharing is Observations/Suggestions on Draft CERC (Terms and Condition of Tariff Regulation), 2024-29 9 revised by way of subsequent orders, explicit regulatory provision towards payment of carrying cost is required to avoid any dispute or litigation in future. In view of the above, we request the Hon’ble Commission to also define the term ‘Carrying cost’ under Definitions section to make it applicable uniformly across all cases, linking it with the rate of Carrying Cost i.e., 1-year SBI MCLR as on 1st April of relevant year plus 100 basis points. Observations/Suggestions on Draft CERC (Terms and Condition of Tariff Regulation), 2024-29 10 2. Chapter 3: Procedure for Tariff Determination 2.1. Application for determination of tariff Draft CERC Tariff Regulations, 2024 “9. Application for determination of tariff: (1) The generating company or the transmission licensee may make an application for determination of tariff for a new generating station or unit thereof or transmission system or element thereof in accordance with these Regulations within 90 days from the actual date of commercial operation: Provided that where the transmission system comprises various elements, the transmission licensee shall file an application for determination of tariff for a group of elements on incurring of expenditure of not less than Rs. 100 Crore or 100% of the cost envisaged in the Investment Approval, whichever is lower, as on the actual date of commercial operation: Provided further that transmission licensees shall combine all the elements of the transmission system in the Investment Approval, which are attaining commissioning during a particular month and declare a single COD for the combined Asset, which shall be the date of the COD of the last element commissioned in that month and such Asset shall be treated as single Asset for tariff purposes. Our Comments/Suggestions 1. Regarding timeline for filing Petition: We agree with the Commission’s view of regulatory overburden due to multiple revisions in the tariff filings based on anticipated COD. The provision of filing the tariff petition after actual COD will allow the utilities to solidify the financials and file the petition as per actual data. However, regarding proposed timeline following is submitted. As per the second proviso of draft regulation 9 (1), transmission licensees shall combine all the elements of the transmission system in the Investment Approval, which are attaining commissioning during a particular month and consider a single COD i.e COD of the element commissioned last for the combined Asset for Tariff purpose. Therefore, to comply with the said provision, in case an asset is commissioned in the beginning of the month, but it is anticipated that commissioning of some more elements during the month is possible, tariff related activities like preparation of Auditor Certificate etc. will be dependent on that other asset. Further, in case the other asset is not commissioned in the same month, delay of that month may create challenge to meet the deadline of filing tariff petition of commissioned asset within 90 days. Observations/Suggestions on Draft CERC (Terms and Condition of Tariff Regulation), 2024-29 11 To reduce the number of Petitions, the same petition is filed for multiple elements of the same project which are commissioned in a close timeframe. In the case discussed above, if 2 elements are commissioned in two different months, then either to comply with 90 day timeline, two petitions are to be filed or else 90 day timeline should be considered from COD of last element. Further, generally cost data is freezed on quarterly basis along with audited results. POWERGRID always endeavors to file its tariff petition as soon as possible so as to expedite commencement of revenue. Therefore, POWERGRID will try to file tariff petitions as soon as possible after COD but considering points discussed above, it is requested that the timeline for filing Petition may be extended to 120 days from the COD as below; (1) The generating company or the transmission licensee may make an application for determination of tariff for a new generating station or unit thereof or transmission system or element thereof in accordance with these Regulations within 90 120 days from the actual date of commercial operation: 2. Regarding Condition for filing Petition: We agree with the Commission’s view of regulatory overburden due to duplicity and high number of petitions being filed for the same Projects involving less/minimal capital cost in few cases. To balance the interest of Licensees as well as to minimize number of petitions, threshold limit as proposed in Tariff Regulations,2024 is a welcome step. However, some of the genuine difficulties faced by Transmission license are submitted as under; As per the draft regulations, it is proposed that tariff filing before the Commission would be based on incurring not less than Rs. 100 Crore or 100% of the cost envisaged in the Investment Approval, whichever is lower. As there are certain elements of transmission system which may achieve timely commercial operation and may be put to use in early stages of the transmission project schedule while others may take longer time to achieve COD due to persistent RoW problems, forest clearance issues etc., the transmission licensee would not be able to charge tariff from beneficiaries, even though the assets are being utilized, till the time such conditions as specified in the proposed regulations are met. Examples: o The scheme - “POWERGRID works associated with immediate evacuation for North Karanpura (3x660 MW) generation project of NTPC in Eastern Region” consists of 02 nos 400kV line bays each at Gaya and Chandwa sub-station. Bays at Gaya sub-station were complete in all respects w.e.f. 06.10.2019. However, in line with regulations, a petition could be filed only after commissioning of bays at Chandwa on 09.09.2021 resulting in delay of COD of approx. 23 months for Gaya Bays vis-à-vis COD i.e., 06.10.2019. o The project - “ERSS-XVIIB in Eastern Region” consists of 11 assets, which includes Installation/Replacement of 9 nos. 400/220 kV 315 MVA ICTs at various locations, 1 no. LILO bypass arrangement at Angul S/s and Reconductoring of Maithon RB – Maithon (PG) 400 kV D/C line along with modification/addition of bay equipment at both ends of the line. Observations/Suggestions on Draft CERC (Terms and Condition of Tariff Regulation), 2024-29 12 Asset were commissioned progressively from 09.06.2019 to 02.03.2022, with the exception of said reconductoring of 400 kV D/C line, which commissioned on Aug’2023. Thus, despite commissioning of almost all elements of the project, the petition for ERSS-XVIIB cannot be filed because of non fulfilment of existing provisions. Such a delay in filing of petition and subsequent tariff determination would lead to deferment of revenue to the licensee leading to mismatch in timing of cash flows. After commissioning of the asset, expenses are incurred on O&M and loan repayment, while the charges shall be allowed to be billed only upon getting interim or final determination of tariff by the Commission. In respect of Communication System, projects comprise of multiple links and commissioning of these links are not necessarily inter-dependent for providing data and voice connectivity. For example, typically a Communication project of Rs. 40 Cr cost comprising of 20 links with a commissioning schedule of 24 months, may have its first lot of links commissioned just after 6 months of award followed by rest of the links in a progressive manner. With proposed condition, Petition cannot be filed till completion of entire project. Further, generally 70-80% of the Investment Approval cost is incurred upto COD. The remaining 20-30% of the expenditure is incurred as AddCap after COD upto Cutoff date. Therefore, the condition of filing of petition cannot be that of ‘incurring 100% of the cost envisaged in the Investment Approval’. It is therefore recommended that to safeguard licensees from being denied the true/real benefit of timely returns, the Transmission Licensee may be allowed to file an application for determination of tariff under any of the following conditions: on capitalization of 50% of the cost envisaged in the Investment Approval or Rs. 100 Crore, whichever is lower, as on the date of COD of an asset; filing of atleast one petition under a project in a financial year for assets already commissioned to be completed during the year; Accordingly subject proviso may be amended as below; Provided that where the transmission system comprises various elements, the transmission licensee shall file an application for determination of tariff for a group of elements on incurring of expenditure of not less than Rs. 100 Crore or 100% 50 % of the cost envisaged in the Investment Approval, whichever is lower, as on the actual date of commercial operation: Provided further, that in case above condition is not fulfilled, Transmission licensee may file one petition under a project in a financial year for assets already commissioned during the year. Observations/Suggestions on Draft CERC (Terms and Condition of Tariff Regulation), 2024-29 13 3. Combining elements of different Investment Approvals in same Tariff Petition: Since present Draft Regulations specifies combining elements under single investment approval, combining elements commissioned during the month on regional level under different projects can also be explored as Investment approval may not be a barrier for combining elements. This will minimize the number of tariff petitions and speed up the tariff approval process while maintaining the sanctity of each Investment Approval. Separate Tariff can be determined as per cost details for multiple assets. As all the beneficiaries of region would be the respondents in that particular petition, their consent/objections can be considered while determination of tariff. Ex: Let us assume 5 elements are commissioned in a particular region in a month then the combined asset name can be as follows: a) Name of asset-1 under project, b) Name of asset-2 under project etc. 4. Combining Truing up Petitions: Tariff Petition may be allowed to be clubbed into a single Petition on the basis of region wise or block wise or any other combination as deemed fit by Hon’ble Commission. The uniqueness of the projects as per the Investment approvals will be maintained in the clubbed petitions. This will significantly reduce number of petitions especially for the True up petitions having no AddCap or DeCap or any directions/liberty specified by CERC in its last order(s), in which cases True up process is majorly limited to arithmetic truing up exercise based on actual MAT rates, interest rates applicable etc.. Further, in such petitions simplified standard tariff forms may be notified by Hon’ble Commission for information and calculations to be submitted. One such draft format is prepared by POWERGRID for ready reference of Hon’ble Commission and the same is enclosed as Annexure-B. If required, Hon’ble Commission may include any other information as deemed necessary. Respondents may be allowed a pre-defined time to give any objections/comments on the tariff calculation submitted by Licensee. 2.2. Requirement of Management Certificate to be signed by Director of the Company Draft CERC Tariff Regulations, 2024 9(1) Third Proviso – Provided further that the generating company or the transmission licensee, as the case may be, shall submit an Auditor Certificate and, in case of non- availability of an Auditor Certificate, a Management Certificate duly signed by an authorised person, not below the level of Director of the company…… Our Comments/Suggestions Difference in tariff based on provisional certificate and the Auditor Certificate, if any, is to be returned back to the beneficiaries with interest. Therefore, the Transmission Licensee does not have any interest in inflating the cost in provisional cost certificate. Further, as per the revised timeline a Petition is to be filed only after COD of elements, Management Certificate may not be required in most cases. However, in exceptional Observations/Suggestions on Draft CERC (Terms and Condition of Tariff Regulation), 2024-29 14 cases, Management Certificate may need to be provided in which cases subsequently auditor certificate is submitted. As submission of Management Certificate duly signed by Director level person involves considerable time, the requirement may please be relaxed. If required, it would be prudent that the initial certificate can be signed at the level of the Regional Executive Director or equivalent for Private licensees authorized by their management to do so.. 2.3. Timeline for filing Truing up petition Draft CERC Tariff Regulations, 2024 9(2) –In case of an existing generating station or unit thereof, or transmission system or element thereof, the application shall be made by the generating company or the transmission licensee, as the case may be, by 31.10.2024, based on admitted capital cost including additional capital expenditure already admitted and incurred up to 31.3.2024 (either based on actual or projected additional capital expenditure) and estimated additional capital expenditure for the respective years of the tariff period 2024- 29 along with the true up petition for the period 2019-24 in accordance with the CERC (Terms and Conditions of Tariff) Regulations, 2019. Our Comments/Suggestions Regulation 13 (2) of the CERC Tariff Regulations,2019 regarding Truing up of tariff for the period 2019-24 provides the following; (2) The generating company or the transmission licensee, as the case may be, shall make an application, as per Annexure-I to these regulations, for carrying out truing up exercise in respect of the generating station or a unit thereof or the transmission system or an element thereof by 30.11.2024. However, in the proposed Regulation 9 (2) of the draft Tariff Regulations,2024, inadvertently the date is mentioned as 31.10.2024 instead of 30.11.2024. Further, as per SEBI (LODR) Regulations, 2015, Regulation 33 requires listed entities to submit their financial results to the stock exchanges within 60 days from the end of the financial year i.e. 30th May 2024. Auditor certificates pertaining to transmission projects for the purpose of truing up petitions can be prepared only after the completion of audit of financial year 2023-24 which is expected to be completed by end of May’24. Thereafter, the process of Auditor Certificate signing is taken up. POWERGRID needs to file approx. 540 nos of truing up petitions. Considering the time required for preparation of truing up petitions incorporating actual expenditure incurred during 2023-24 as per the Audited Accounts, filing for such cases can only commence from June’24. Keeping in view the same and huge numbers of truing up petition to be filed, it is requested to increase the time limit for filing true up petitions to 270 days from the date of effectiveness of these Regulations i.e. till Dec’24. Observations/Suggestions on Draft CERC (Terms and Condition of Tariff Regulation), 2024-29 15 2.4. Carrying cost for a new transmission system or element Draft CERC Tariff Regulations, 2024 9 (5) In case the generating company or the transmission licensee files the application as per the timeline specified in sub-clause (1) to (4) of this Regulation, carrying cost shall be allowed from the date of commercial operation of the project: Provided that in case the generating company or the transmission licensee delays in filing of application as per the timeline specified in sub-clause (1) to (4) of this Regulation, carrying cost shall be allowed to the generating company or the transmission licensee from the date of filing of the application as per Regulation 10(7) and 10(8) of these regulations. Our Comments/Suggestions Proposed Regulation 9 (5) provides for carrying cost when the Tariff Petition is filed as per the timeline specified in sub-clause (1) to (4) of this Regulation. Carrying cost is referred in multiple places in the Draft Regulations and wherever it is applicable, rate for carrying cost is provided. However, in the referred Regulation, rate of carrying cost is not provided. In our comments at para 1.7 above, it is requested to provide a definition of Carrying cost specifying as the simple interest rate of 1-year SBI MCLR plus 100 bps. However, for better clarity, following changes may be made in referred Regulation. 9 (5) In case the generating company or the transmission licensee files the application as per the timeline specified in sub-clause (1) to (4) of this Regulation, carrying cost at the simple interest rate of 1-year SBI MCLR plus 100 bps shall be allowed from the date of commercial operation of the project: 2.5. Determination of Tariff Draft CERC Tariff Regulations, 2024 10(1) & 10(2) - Petition to be made as per Annexure –I of the Regulations. Our Comments/Suggestions The Annexure – I which deals with the detailed requirements of the Petition to be filed with the Commission for the Transmission assets is not provided with the draft regulations. However, it is submitted that the same needs to be modified based on the comments/suggestion made herein against the respective provisions. Observations/Suggestions on Draft CERC (Terms and Condition of Tariff Regulation), 2024-29 16 2.6. Interim tariff & variation in Projected Capital Expenditure Draft CERC Tariff Regulations, 2024 10.(3) If the information furnished in the petition is in accordance with these regulations, the Commission may consider granting interim tariff of up to ninety per cent (90%) of the tariff claimed in case of new generating station or unit thereof or transmission system or element thereof during the first hearing of the application: Provided that in case the final tariff determined by the Commission is lower than the interim tariff by more than 10%, the generating company or transmission licensee shall return the excess amount recovered from the beneficiaries or long term customers, as the case may be with simple interest at 1.20 times of the rate worked out on the basis of 1 year SBI MCLR plus 100 basis points prevailing as on 1st April of the financial year in in which such excess recovery was made. ……….. 10. (8) Where the capital cost approved by the Commission on the basis of projected additional capital expenditure exceeds the actual trued up additional capital expenditure incurred on a year to year basis by more than 10%, the generating company or the transmission licensee shall refund to the beneficiaries or the long term customers as the case may be, the tariff recovered corresponding to the additional capital expenditure not incurred, as approved by the Commission, along with simple interest at 1.20 times of the rate worked out on the basis of 1 year SBI MCLR plus 100 basis points as prevalent on 1st April of the respective year. Our Comments/Suggestions Regarding Interim tariff, it is submitted that subject provision for allowing up to ninety per cent (90%) of the tariff claimed in case of transmission system or element thereof during the first hearing of the application is a welcome step. Despite having such provisions in the Tariff Regulations,2019 the same was not followed affecting cash flow for Transmission licensee whereas it has to incur expenses towards debt and O&M from its internal resources and it also resulted in arrear shock to beneficiaries. However, as per the proposed draft regulation, now petition is to be filed after COD which may take 2-4 months as discussed above at para 2.1. Further, first hearing may take another 2-4 months ultimately resulting in interim order coming after 4-8 months of COD. Therefore, based on above discussion, it is requested that 90% of the claimed tariff as per the filed petition may be allowed to be provisionally billed as per the provision of Sharing regulations without interim / final order as it would provide cash flow to RTM licensee. Further, it will remove the requirement of provisional tariff order, hence, reducing the workload of CERC. The under / over recovery of tariffs as per final order can be adjusted as per existing regulations. This would also benefit the DICs by way of reducing their interest and sudden impact of arrear billing. Observations/Suggestions on Draft CERC (Terms and Condition of Tariff Regulation), 2024-29 17 Regarding difference in Interim and Final Tariff, the regulations propose levy of penal interest at the rate of 1.2 times the rate worked out on the basis of 1 year SBI MCLR plus 100 basis points in case the final tariff determined by the Commission is lower than the interim tariff by more than 10%. Here it is submitted that as per the proposed Regulation 9 (1), Petition for new assets is to be filed only after COD. Thus, Petition will be filed on actual costs upto COD and projected AddCaps. Transmission utilities submit their petition after conducting a diligent and prudent review as part of the filing process, therefore chances for change in COD cost is very less. Variation in Interim tariff and Final tariff more than 10% can occur only when some assets are having unprecedented time overrun or cost overrun and the Hon'ble Commission may hold a divergent perspective while approving the tariff. Only in such a scenario, there is a probability of more than 10% variance. This will result in a dual penalty for the transmission licensee in the form of deduction in IDC & IEDC along with additional penalty for refunding the surplus amount with the carrying cost calculated as 1.20 times the 1-year SBI MCLR plus 100 basis points, as of the 1st of April in the relevant financial year when the excess recovery occurred. Therefore, we request the Commission to allow the refund of the excess tariff with simple interest at the rate of 1.05 times 1-year SBI MCLR plus 100 basis points prevailing as on 1st April of the financial year in which such excess recovery was made. Provision may be modified as below ; 10.(3)………. Provided that in case the final tariff determined by the Commission is lower than the interim tariff by more than 10%, the generating company or transmission licensee shall return the excess amount recovered from the beneficiaries or long term customers, as the case may be with simple interest at 1.20 1.05 times of the rate worked out on the basis of 1 year SBI MCLR plus 100 basis points prevailing as on 1st April of the financial year in in which such excess recovery was made. Regarding difference in AddCap, it is submitted that the expenses incurred during AddCap or contract closing stages of the project can vary depending upon number of factors, which may be beyond the control of the licensee (viz. price variation due to inflation, claims and counter claims, arbitration awards, retention payments, defect liability etc.). Further, these differences in AddCap may be due to spill over from one year to another. Therefore, it is proposed that there should not be any difference in interest rate applicable for capital expenditure or additional capitalization being excess or shortfall than that projected. Both scenarios should be treated the same and adjustment of both should be allowed at the same rate of 1-year SBI MCLR plus 100 basis points prevailing as on 1st April of the financial year in which such excess or under recovery was made. In case deemed essential, it should be at the rate of 1.05 times 1-year SBI MCLR plus 100 basis points prevailing as on 1st April of the financial year in which such excess recovery was made. Provision may be modified as below ; Observations/Suggestions on Draft CERC (Terms and Condition of Tariff Regulation), 2024-29 18 10. (8) Where the capital cost approved by the Commission on the basis of projected additional capital expenditure exceeds the actual trued up additional capital expenditure incurred on a year to year basis by more than 10%, the generating company or the transmission licensee shall refund to the beneficiaries or the long term customers as the case may be, the tariff recovered corresponding to the additional capital expenditure not incurred, as approved by the Commission, along with simple interest at 1.20 1.05 times of the rate worked out on the basis of 1 year SBI MCLR plus 100 basis points as prevalent on 1st April of the respective year. 2.7. Raising of Differential Bills Draft CERC Tariff Regulations, 2024 10.(7) Subject to Sub-Clause (8) below, the difference between the tariff determined in accordance with clauses (3) and (5) above and clauses (4) and (5) above, shall be recovered from or refunded to, the beneficiaries or the long term customers, as the case may be, with simple interest at the rate at the rate equal to the 1 year SBI MCLR plus 100 basis points prevailing as on 1st April of the respective year of the tariff period, in six equal monthly instalments. Provided that the bills to recover or refund shall be raised by the generating company or the transmission licensees within 30 days from the issuance of the Order. Provided further that such interest, including that determined as per sub-clause (8) of this regulation shall be payable till the date of issuance of the Order and no interest shall be allowed or levied during the period of six-monthly instalments. Provided further that in case where money is to be refunded and there is a delay in the raising of bills by the generating company or transmission licensees beyond 30 days from the issuance of the Order, it shall attract a late payment surcharge as applicable in accordance with these regulations. Our Comments/Suggestions Regarding raising of bills for recovery or refund of differential tariff, it is submitted that for all ISTS Transmission licensees, bills for differential tariff if any are raised by CTUIL in Second Bill in accordance with CERC Sharing Regulations and Billing, Collection and Disbursement Procedure. Second Bills are raised on a quarterly basis as per the regulatory provisions and Transmission Licensee has no control in raising of such bill. Therefore, in proposed proviso first and three of Regulations 10 (7), the word “or transmission licensees “needs to be deleted and no additional penalty be imposed on the Transmission licensee for any delay in raising the bill for recovery or refund if any by CTUIL. Rather, suitable provisions may be provided in Sharing Regulations to address the timeline for raising differential bills. Observations/Suggestions on Draft CERC (Terms and Condition of Tariff Regulation), 2024-29 19 Regarding six equal monthly instalments, it is submitted that such delay in payment under installments are not covered under tariff norms set for ‘Interest on Working Capital’ and therefore payment in installments increases the working capital requirement for Transmission companies. Further, unlike Generation, Sharing of Transmission charges is done under pool system where any under recovery is to be shared by all Licensees. Further, the pooled billing under the Sharing Regulations is done by the CTU which comprises the billing pertaining to TBCB licensees also. Installments availed lead to deferred recovery of all licensees without any fault of them. Not only considering the interests of Discoms, but a balance is also required to be achieved from Licensee’s perspective also. Thus, options for instalments may not be provided in respect of dues of transmission licensees. Alternatively, if felt necessary, it is submitted that the modalities regarding the same is to be streamlined. It is understood that some DICs unnecessarily delay intimation regarding their decision to avail instalment whereas some beneficiaries may want to avail less than 6 installments as per their choices. Therefore, in case instalment is provided then Regulation should provide that beneficiaries should intimate their decision for availing instalments within 15 days of raising of Bills and such instalments alongwith carrying cost may be allowed by CTU with the payment of first installment commencing on the 30th day from the date of raising the bill. Simple interest at the rate of 1 year SBI MCLR plus 100 basis points prevailing as on 1st April of the respective year may also be made applicable for such installments. Therefore, Regulations 10. (7) may be modified as below; 10.(7) Subject to Sub-Clause (8) below, the difference between the tariff determined in accordance with clauses (3) and (5) above and clauses (4) and (5) above, shall be recovered from or refunded to, ……, as the case may be, with simple interest at the rate at the rate equal to the 1 year SBI MCLR plus 100 basis points prevailing …… of the tariff period, in maximum of six equal monthly instalments Provided that the bills to recover or refund shall be raised by the generating company or the transmission licensees within 30 days from the issuance of the Order. Provided that the bills to recover or refund for the transmission licensees shall be raised by CTUIL in accordance with the provision of Sharing Regulations. Provided further that such interest, including that determined as per sub-clause (8) of this regulation shall be payable till the date of issuance of the Order and no interest shall be allowed or levied during the period of six-monthly instalments availed at the rate equal to the 1 year SBI MCLR shall also be applicable. Provided further that in case where money is to be refunded and there is a delay in the raising of bills by the generating company or transmission licensees beyond 30 days from the issuance of the Order, it shall attract a late payment surcharge as applicable in accordance with these regulations. Observations/Suggestions on Draft CERC (Terms and Condition of Tariff Regulation), 2024-29 20 2.8. Revision in Tariff as a consequence of Orders in Review Petition or Judgment by APTEL/Higher Court Draft CERC Tariff Regulations, 2024 No Provision is provided. Our Comments/Suggestions Draft Regulation provides various regulations regarding recovery/refund of differential tariff on account of revision of tariff in ‘Chapter-3 i.e Procedure for Tariff Determination’. Apart from the conditions envisaged in draft Regulations, there can be other cases such as when the tariff approved by Hon’ble Commission is challenged by either Petitioner or Respondent in CERC or APTEL / any other court, and either tariff or sharing is revised by way of subsequent orders. Number of such cases have increased during ongoing 2019-24 block. Generally, it takes considerable time to get orders in such cases. Further, there is always a risk that either the Petitioner or the respondent may further challenge the subsequent order in next higher court. If any stay against original order is granted, such legal process affects the cash flow of the Transmission licensees. Therefore, in such cases, carrying cost is required for Licensees for any upward revision of tariff or if excess tariff is already recovered the same has to be refunded/recovered along with carrying cost. Therefore, to avoid any dispute or litigation, it is requested that Tariff Regulations,2024 may provide a specific regulation in this regard as proposed below; 10. Determination of tariff ……….. (9) Where the tariff determined by the Commission is revised as a result of order in Review Petition or Judgement pronounced by APTEL or Judgement pronounced by any other higher court, the difference in tariff due to subsequent orders or judgment as the case may be, shall be recovered from or refunded to, the beneficiaries or the long term customers, as the case may be, with simple interest at the rate equal to the 1 year SBI MCLR plus 100 basis points prevailing as on 1st April of the respective year 2.9. In-principle Approval in Specific circumstances Draft CERC Tariff Regulations, 2024 11. In-principle approval in specific circumstances: The generating company for a specific generating station or for an integrated mine or the transmission licensee undertaking any additional capitalization on account of change in law events or force majeure conditions may file petition for in-principle approval for incurring such expenditure after prior notice to the beneficiaries or the long term customers, as the case may be, along with underlying assumptions, estimates and justification for such expenditure if the estimated expenditure exceeds 10% of the admitted capital cost of the project or Rs.100 Crore, whichever is lower. Observations/Suggestions on Draft CERC (Terms and Condition of Tariff Regulation), 2024-29 21 Our Comments/Suggestions After commissioning of the project, the Transmission Licensees may require to modify/shift its assets through development of alternate solution either by using multi- circuit towers, raising height of towers or change the route of the line in order to address force majeure conditions of Right of Way (RoW) constraints due to urbanization, change in river course, execution of highway/railway line/other transmission lines in transmission tower route, etc. The execution of such works is required to be carried out by the Transmission Licensees in a time bound manner. As per the regulations, an in-principle approval is required to be taken from the Commission for carrying out additional capitalization in such cases after prior notice to the beneficiaries. In fact, such works are planned by Planning Authorities and carried out by licensees as per the discussions and assessments of benefits in respective RPCs. Therefore, requirement of prior notice again to beneficiaries may be reviewed. Since the petition filed by the Transmission Licensee for taking in-principal approval of the Commission shall also be sent to the beneficiaries as they shall be the Respondents of the petition, prior notice to them as such is not required. Instead, if required, such prior notice may be given to CTU. Therefore, the provision may be modified by deleting this requirement as provided below; 11. In-principle approval in specific circumstances: The generating company for a specific generating station or for an integrated mine or the transmission licensee undertaking any additional capitalization on account of change in law events or force majeure conditions may file petition for in-principle approval for incurring such expenditure after prior notice to the beneficiaries or the long term customers as the case may be CTUIL, along with underlying assumptions, estimates and justification for such expend…………. 2.10. Refund when actual additional capital expenditure falls short of the projected additional capital expenditure Draft CERC Tariff Regulations, 2024 13. Truing up of tariff for the period 2024-29 (4). ………….. Provided that if the actual additional capital expenditure falls short of the projected additional capital expenditure allowed under provisions of Chapter 7 of these regulations, the generating company or the transmission licensee, as the case may be, shall not be required to file any interim true up petition for this purpose and shall refund to the beneficiaries or the long term customers, as the case may be, the excess tariff recovered corresponding to the projected additional capital expenditure not incurred, in accordance with Regulation 10(7) and 10(8) of these regulations, as the case may be under intimation to the Commission: Observations/Suggestions on Draft CERC (Terms and Condition of Tariff Regulation), 2024-29 22 Provided further that the generating company or the transmission licensee shall submit the complete details along with the calculations of the refunds made to the beneficiaries or the long term customers, as the case may be, at the time of true up. Our Comments/Suggestions The Transmission Charges are recovered from the beneficiaries based on annual fixed charges (AFC) approved by CERC as per the orders issued in the tariff petitions. The AFC approved by CERC are inter-alia based on admitted actual/projected expenditure and provisional parameters viz., funding, interest rate, MAT rate, etc. admitted in tariff petitions for the control period. Regulation 13(4) provides for refund of excess tariff recovered on account of actual additional capital expenditure falling short of the allowed projected additional capital expenditure without requiring to file any interim true up petition. Here it is to mention that apart from projected AddCap, excess tariff may also be due to decrease in other provisional parameters viz., funding, interest rate, MAT rate. During the 2019-24 block, interest rates have undergone high fluctuation mainly during Covid Period wherein interest rates reduced significantly. It also resulted in decrease in Actual tariff vis-à-vis approved tariff. Considering the same, it is proposed that the regulation may provide that the Transmission licensee can refund excess tariff on accounts of other reasons also viz funding, interest rate, MAT rate, etc. without filing interim true up petition and submit the details of the same to Commission at the time of Truing up. Observations/Suggestions on Draft CERC (Terms and Condition of Tariff Regulation), 2024-29 23 3. Chapter 5: Capital Structure 3.1. Treatment of grant in Capital cost Draft CERC Tariff Regulations, 2024 18. Debt-Equity Ratio: (1) For new projects, the debt-equity ratio of 70:30 as on date of commercial operation shall be considered. If the equity actually deployed is more than 30% of the capital cost, equity in excess of 30% shall be treated as normative loan: Provided that: ……… iii. any grant obtained for the execution of the project shall not be considered as a part of capital structure for the purpose of debt: equity ratio. Our Comments/Suggestions In certain cases, grants sanctioned to Transmission projects also specify some additional conditions to be fulfilled. In the past, in some of the projects like for STATCOM, 95% of the project cost was provided as grant but the remaining 5% of the project was totally considered as Equity instead of allowing at D:E ratio of 70:30. Further, in any project minimum equity is required to be allowed to balance the risks of the project with commensurate return and maintain the interests of the licensee. Otherwise in case of any major overhead over and above allowed O&M expense, project shall become unviable for Transmission licensee. Therefore, to balance the interest of Transmission licensee and Consumers, a minimum equity infusion is required to be allowed even after infusion of the grant. Considering above, it is proposed that the subject Regulation may be amended as below; Provided that: ……… iii. any grant obtained for the execution of the project shall not be considered as a part of capital structure for the purpose of debt: equity ratio. Provided that the conditions of sanction of grant and decisions taken during planning stage shall also be considered while admitting Capital cost and debt: equity ratio. Observations/Suggestions on Draft CERC (Terms and Condition of Tariff Regulation), 2024-29 24 4. Chapter 6: Computation of Capital Cost 4.1. Exclusions from capital cost Draft CERC Tariff Regulations, 2024 “19 (6) The following shall be excluded from the capital cost of the existing and new projects: (a) The assets forming part of the project, but not in use, as declared … petition; ……….. (e) Proportionate cost of land of the existing project which is being used for generating power from generating station based on renewable energy; and …….. Our Comments/Suggestions Transmission utilities have some resources in the form of land banks and other enabling infrastructure and human resources that can be utilised to increase non-core revenues through lease, data centers, ecotourism, etc., POWERGRID in past has been in forefront to use such infrastructure to create long term business opportunities to optimise use of transmission infrastructure. POWERGRID is also planning to explore opportunities in the renewable spaces and related green businesses to support the Government of India’s vision of achieving Renewable Energy target of 500 GW by 2030. Installation of RE (especially solar power) requires the availability of large patches of land. In this regard, it may be noted that POWERGRID has availability of land in some of the projects across India which can be suited for Solar Generation. Further, considering PAN India presence of POWERGRID at more than 250 locations, it is also strategically placed for undertaking businesses like BESS, Green Hydrogen, EV Charging Station, etc. Thus, enabling provisions in the Tariff regulations may also be provided to Transmission licensees, similar to Generation for allowing in principle approval for utilization of existing infrastructure for undertaking other businesses. In this regard, it is requested that proposed Regulation 19 (6)(e) may be extended for RE installations, Data Centre, Green Hydrogen, BESS, EV Charging Station etc in sub-station to optimize use of existing infrastructure. Accordingly following changes in proposed in subject regulation (e) Proportionate cost of land of the existing Generation or Transmission project which is being used for generating power from generating station based on renewable energy or for any other associated business such as Data Centre, Green Hydrogen, BESS, EV Charging Station as approved by Commission; and …….. This will additionally result in reduced transmission charges for beneficiaries through optimum utilization of the infrastructure as envisaged under the Electricity Act,2003. Observations/Suggestions on Draft CERC (Terms and Condition of Tariff Regulation), 2024-29 25 4.2. Delay in Statutory Clearances Draft CERC Tariff Regulations, 2024 “21 (5) If the delay in achieving the COD is attributable either in entirety or in part to the generating company or the transmission licensee or its contractor or supplier or agency, in such cases, IDC and IEDC due to such delay may be disallowed after prudence check either in entirety or on pro rata basis corresponding to the period of delay not condoned vis à vis total implementation period and the liquidated damages , if any, recovered from the contractor or supplier or agency shall be retained by the generating company or the transmission licensee, in the same proportion of delay not condoned vis à vis total implementation period. Provided that in case of activities like obtaining forest clearance, NHAI Clearance, approval of Railways, and acquisition of government land, where delay is on account of delay in approval of concerned authority, in such cases maximum condonation shall be allowed up to 90% of the delay associated with obtaining such approvals or clearances. Our Comments/Suggestions Transmission projects are linear infrastructure projects that span across different geographies utilizing land owned by public/private/ State/Forest. Some of the projects gets delayed due to delay in obtaining statutory clearances like forest clearance for transmission lines, acquisition of land for sub-stations, acquiring right of way for transmission lines, Law and Order issues, obtaining other clearances such as power line and railway crossings etc. which falls under the definition of Force Majeure events as per CERC Tariff Regulations and are beyond the control of the Utilities. Despite challenges, POWERGRID implements most of the transmission projects/ elements within specified timeline by adopting best utility practices, project management, prudence and commitment. POWERGIRD officials gets actively involved with the authorities at Local, State and Central level to obtain clearances in a timely manner. Further, many steps have been taken in the past by POWERGRID in consultation with concerned Government departments, Ministries, Infrastructure developers to improve the system, timely review, escalation and resolution of the issues. Regarding Forest proposals, it is submitted that POWERGRID as a utility takes all measures to submit complete proposals in line with the Ministry of Environment, Forests and Climate Change (MoEFCC)/ State Specific requirements. Wherever required POWERGRID takes the help of MoP and different Ministries, State Govts., various levels of Central govt. to minimize delay in forest approvals. As and when required, specific issues faced in expediting forest clearance are also brought to the notice of MoP e.g., for bringing changes in the PARIVESH portal for expediting forest proposals including notification of Standard Checklist required for submission of forest proposals by MoEFCC. MoP has taken up these issues with MoEFCC. Observations/Suggestions on Draft CERC (Terms and Condition of Tariff Regulation), 2024-29 26 Senior management of POWERGRID also participates in Fortnightly Regional Coordination Meeting (FRCM) on Linear Project conducted by MoEFCC, wherein all heads of Integrated Regional Offices (IROs) of the Ministry meet with all User Agencies relating to forest and wildlife clearances in respect of linear projects. In these meetings POWERGRID Senior management takes up its issues for their timely resolution. Further, if required matters where delay is attributed to factors outside the control of POWERGRID are also put up for resolution in PRAGATI (Pro-Active Governance and Timely Implementation) which is a three-tier platform (PMO, Union Government Secretaries, and Chief Secretaries of the States) to inter-alia monitor/review projects and to resolve issues under the chairmanship of Hon’ble Prime Minister. Further, it is to mention the delays or inactive persuasion with the authorities for the clearances is never in favour of POWERGRID’s interest as it results in deferred cash flow and reduction in envisaged return to the Company. A delay of 1 year even condoned reduces Effective RoE to 11.99% from 12.8 % when there is no delay. Therefore, POWERGRID always does its best to minimise the delay. In cases where delay is condoned but there is a mismatch with upstream/downstream network, then transmission licensees already have to pay charges for mismatch period which can be considerably high at times. Furthermore, the Hon’ble Commission already considers delay on account of Uncontrollable factors such as acquisition of land as per the provisions of the Tariff Regulations. Thus, considering the entire delay on account of Uncontrollable factors as beyond the control of transmission licensee and then subsequently, penalising them by only allowing upto 90% of delay is contradictory. Also there is no clarity on how the Hon’ble Commission will deal with the delay in case there is an overlap of period between delay due to statutory clearances and delay due to other reasons such as RoW issues etc. Most importantly, efforts put in by POWERGRID has to undergo the litmus test of Prudence check by CERC and even in case of best effort by POWERGRID, sometimes delays are disallowed due to lack of proper documentation. Based on the above discussion, it is requested that once the delay has been condoned, project should not be subjected to any further deduction / penalty. Considering that the utilities are automatically disincentivized if the project gets delayed, if any such additional penalty is imposed, it will lead to further loss to developer without any fault. Such approach may unnecessarily result in increased uncertainty and risk in the sector and will affect Investor’s sentiment. Hence, it is requested that when the delay is on account of statutory clearances, maximum condonation shall be allowed up to 100% of the delay associated with obtaining such approvals or clearances and no penalty be imposed on the Utilities. Observations/Suggestions on Draft CERC (Terms and Condition of Tariff Regulation), 2024-29 27 4.3. Uncontrollable factors Draft CERC Tariff Regulations, 2024 22. Controllable and Uncontrollable factors: The following shall be considered as controllable and uncontrollable factors for deciding time overrun, cost escalation, IDC and IEDC of the new projects: ……… (2) The "uncontrollable factors" shall include but shall not be limited to the following: a. Force Majeure events; b. Change in Law; and c. Land acquisition except where the delay is attributable to the generating company or the transmission licensee. Our Comments/Suggestions Delay in obtaining forest clearance is a major factor contributing to time and cost over- runs in implementation of projects and POWERGRID proposes to identify the same as an uncontrollable factor. It is highlighted that getting statutory clearances from Railways is another arduous task which consumes considerable time and effort. In some cases, the consequences of delay in getting Forest / railway clearances have been so severe that the commissioning of projects have been pushed back by years. Moreover, POWERGRID wishes to stress upon the fact that obtaining shutdown in case of power line crossings in new projects is also a major area of concern during execution of projects. There are technical constraints in obtaining shutdown of lines associated with Renewable Energy (RE) Generating Stations, which are ‘Must-Run’ in nature, and high capacity thermal plants, which are required to operate at technical minimum. This usually leads to non-issuance of timely shutdown by RLDCs (despite the shutdowns being approved in OCC meetings in some cases) and ultimately prevents commissioning of projects within scheduled time frame. Also, it is emphasized that abnormal amount of time is required for obtaining shutdown of power lines owned by State Discoms/Distribution Utilities, which in turn delays the projects. Though it is conceded that such delays are admitted by CERC on case to case basis, a regulatory provision supporting the same would make filing petitions less cumbersome for licensees. Therefore, POWERGRID requests that the delay in obtaining forest clearance and other statutory clearances like Railway Clearance, Highway Clearance, delay in grant of Shutdowns by RPCs/RLDCs/SLDCs including power line crossings and shut down by RE plants etc. may also be covered under uncontrollable factor as they are beyond the control of Transmission licensees. Observations/Suggestions on Draft CERC (Terms and Condition of Tariff Regulation), 2024-29 28 4.4. Initial Spares Draft CERC Tariff Regulations, 2024 23. Initial Spares: Initial spares shall be capitalised as a percentage of the Plant and Machinery cost upto cut-off date, subject to following ceiling norms: (i) Transmission line including UG Cable - 1.00% …….. Provided that: …… Our Comments/Suggestions Regarding High Voltage Underground cable, it is submitted that due to severe RoW issues and increasing urbanization, some projects are being planned considering a portion or complete transmission line with HV underground cables. In Tariff Regulations,2019, there is no norm specified for Initial Spares for HV Underground Cable Systems and therefore there is requirement of separate norms. In the draft Regulations, Underground cable is merged with Transmission Lines. Here it is to mention that High Voltage Underground cable being an imported item and supplied by a few foreign manufacturers, the lead time of procurement here is much higher than any onshore equipment. Hence it is necessary to maintain an adequate supply of spares to take care of any contingency so that the system does not remain idle due to unavailability of spares. In CERC Tariff Regulations 2019, for first time new technology equipment i.e., SVC/STATCOM, 6% of initial spares is allowed. Thus, in the past CERC has provided higher spare norms for new technology equipment. Considering that there is no historical data for HV underground cable (except “±320kV VSC based 2000 MW Pugalur (HVDC) - North Trichur HVDC(Kerala) HVDC link” project where Spares @3% were considered), and spare requirement may be unique and location/site specific, it would be difficult to arrive at a ceiling norm based on historical data. However, for system reliability, initial spare requirement is mandatory for HV cables also and therefore it is proposed that initial spare for High Voltage Underground Cables may be allowed based on actuals after prudence check on case to case basis as below; (i) Transmission line including UG Cable - 1.00% …….. Provided that: iv. Initial spare for High Voltage Underground Cables may be allowed based on actuals after prudence check on case to case basis Observations/Suggestions on Draft CERC (Terms and Condition of Tariff Regulation), 2024-29 29 5. Chapter 7: Computation of Additional Capital Expenditure 5.1. Treatment of Additional Capitalization for land lease renewal Draft CERC Tariff Regulations, 2024 25. Additional Capitalisation within the original scope and after the cut-off date: (1) The additional capital expenditure incurred or projected to be incurred in respect of an existing project or a new project on the following counts …. may be admitted by the Commission, subject to prudence check: (a) Payment made against award of arbitration or for compliance ….. (f) Works within original scope executed after the cut-off date and admitted by the Commission, to the extent of actual payments made; and Our Comments/Suggestions POWERGRID is presently maintaining multiple old Substations which were originally got transferred from different Utilities. Regarding such S/s, in many cases lands were taken on long term lease basis from other Utilities/Government bodies e.g Vizag S/s, Durgapur S/s. In general, the land lease for transmission projects is around 25 years. However, the system continues to work perpetually with modification/upgradation as and when required. Lease of land for such S/s are getting expired and original owners are proposing POWERGRID to renew lease or purchase lands at prevailing market price. Quoted Land/Lease costs for such S/s are exorbitantly high and even higher than original project cost. Such expenditure is capital expenditure in nature with significant cost implication. Lands being part of original project, such expenditures qualify as Additional Capitalisation within the original scope and after the cut-off date. However, presently no regulation covers such expenditure, but such cases may increase in future also. Therefore, it is proposed that Regulations may allow such costs as AddCap and in cases where apart from onetime payment, annual lease payment is also to be made, the same shall also be allowed to be billed as per actuals. Thus, new proviso may be added. 25. Additional Capitalisation within the original scope and after the cut-off date: (1) The additional capital expenditure incurred or projected to be incurred in respect of an existing project or a new project on the following counts ……. (f) Works within original scope executed after the cut-off date and admitted by the Commission, to the extent of actual payments made; and (g) One time Payment on renewal of lease hold land as per actuals Observations/Suggestions on Draft CERC (Terms and Condition of Tariff Regulation), 2024-29 30 5.2. Additional Capitalisation within the original scope and after the cut-off date Draft CERC Tariff Regulations, 2024 25. Additional Capitalisation within the original scope and after the cut-off date: ………. (2) ………. Provided that any claim of additional capitalisation with respect to the replacement of assets under the original scope and on account of obsolescence of technology, less than Rs. 20 lakhs shall not be considered as part of Capital cost and shall be met by Generating company and Transmission licensee through normative O&M charges only. 26. Additional Capitalisation beyond the original scope ……….. (2) Any claim of additional capitalisation less than Rs. 20 lakhs shall not be considered under Clause (1) of this regulation. Our Comments/Suggestions As discussed above at Para 1.3 regarding definition of ‘Operation and Maintenance Expenses’ or ‘O&M expenses', additional capitalisation less than Rs. 20 lakhs should not be considered as O&M expense and may be made applicable for Generation only. The actual expenditure submitted to CERC by POWERGRID, for determination of O&M charges for 2024-29 block do not include such expenditure which have already been allowed by Commission under Additional capitalization. Therefore, reference to O&M expenses', additional capitalisation less than Rs. 20 lakhs’ may be deleted as shown below; 25. Additional Capitalisation within the original scope and after the cut-off date: ………. (2) ………. Provided that any claim of additional capitalisation with respect to the replacement of assets under the original scope and on account of obsolescence of technology, less than Rs. 20 lakhs shall not be considered as part of Capital cost and shall be met by Generating company and Transmission licensee through normative O&M charges only. 26. Additional Capitalisation beyond the original scope ……….. (2) Any claim of additional capitalisation less than Rs. 20 lakhs shall not be considered under Clause (1) of this regulation. Observations/Suggestions on Draft CERC (Terms and Condition of Tariff Regulation), 2024-29 31 6. Chapter 8: Computation of Annual Fixed Cost 6.1. Norms for New Transmission Projects Chapter 8 (Computation of Annual Fixed Cost) inter-alia covers computation of AFC components such as Return on Equity, Depreciation, and Interest on Loan. The Hon’ble Commission has proposed different norms for Return on Equity, Depreciation, and Interest on Loan for existing and new Transmission projects i.e. those achieving COD on or after 1.4.2024. Detailed suggestions related to these components have been provided in the subsequent paras below. However, regarding cutoff date i.e. 01.04.2024 for different norms, following is submitted. Investment decisions, financial closures etc. for the projects conceived during the 2019-24 control period were taken on the basis of prevailing parameters/norms and returns as provided in the CERC Tariff Regulations 2019. Change in the methodology for the computation of Annual Fixed Cost for such projects will bring regulatory uncertainty and complexity. Further, if the new projects are defined as the ones which have achieved COD on or after 1.4.2024, then there might be a possibility that for the same projects some elements may get commissioned prior to 31st March 2024 and remaining elements to be commissioned after 1.4.2024. In such a scenario, two different norms will prevail for different elements of the same project. As long as assets are of same project and provide the same level of service, then there is no justification for a differentiated return between the two categories. These two sets of assets in the same project will never be combined during the true- up owing to different norms of RoE, Depreciation and Interest on Loan. Therefore, it will again increase the complexity of Tariff Determination process wherein One project shall continue throughout its life as Two projects for tariff determination process ultimately resulting in regulatory overburden on Commission itself. The proposed definition of new projects will further complicate the interest on loan calculations, as IoL for some assets will be calculated based on weighted average rate of interest for actual/allocated loan portfolio of the project, and IoL for the remaining assets will be calculated based on the weighted average rate of interest calculated based on the actual loan portfolio of the Company. Therefore, it is recommended that the different tariff norms as discussed above should be made applicable for only the projects for whom the Investment Approval has been accorded on or after 1.4.2024. For projects achieving COD on or after 1.4.2024 but whose Investment Approval was given prior to 1.4.2024, norms as prevailing for existing projects may continue to be allowed. Observations/Suggestions on Draft CERC (Terms and Condition of Tariff Regulation), 2024-29 32 6.2. Return on Equity 6.2.1. Maintenance of Existing Rate of Return on Equity Draft CERC Tariff Regulations, 2024 30. Return on Equity: (1) Return on equity shall be computed in rupee terms, on the equity base determined in accordance with Regulation 18 of these regulations. (2) Return on equity for existing project shall be computed at the base rate of 15.50% for thermal generating station, transmission system including communication system and run-of- river hydro generating station and at the base rate of 16.50% for storage type hydro generating stations, pumped storage hydro generating stations and run-of- river generating station with pondage; (3) Return on equity for new project achieving COD on or after 01.04.2024 shall be computed at the base rate of 15.00% for the transmission system, including the communication system, at the base rate of 15.50% for Thermal Generating Station and run-of-river hydro generating station and at the base rate of 17.00% for storage type hydro generating stations, pumped storage hydro generating stations and run-of-river generating station with pondage; Our Comments/Suggestions For Transmission, Hon’ble Commission in the draft Tariff Regulations,2024 has proposed different rate of RoE for Existing Projects and New Projects. For Existing Projects, the rate of RoE has been retained at 15.5%. For New Projects, the rate of RoE is provided as 15%. As Tariff is determined on multiyear principles, maintaining regulatory certainty over each control period is of utmost importance to maintain Investor confidence. Stable regulatory environment as being provided by Hon’ble Commission to all the stakeholders has been the key to the growth of Power Sector and considering the transition phase wherein on one hand huge investment is required for Renewable integration and to meet fast growing power demand, at the same time, the nature of grid including demand pattern and power flow is also undergoing massive change. At this juncture of transformation, Regulatory uncertainty is to be avoided and therefore POWERGRID appreciate that the Hon’ble Commission has rightly maintained rate of RoE at 15.5 % for existing projects. However, the proposed RoE of 15% for new projects is neither commensurate with the investment risks in Transmission nor sufficient to meet the growing investment needs. Therefore, we request the Hon’ble Commission to maintain rate of RoE at 15.5% for new Projects also. In this regard our detailed submissions are as below; Observations/Suggestions on Draft CERC (Terms and Condition of Tariff Regulation), 2024-29 33 A. Risk in Transmission Business In a Regulated Tariff Mechanism, the utilities are allowed to earn reasonable return on their investments as a compensation for assuming the investment related risks. It is based on the principle of opportunity cost and risk premium for the investments made in the sector. The rate of Return on Equity is determined based on the assessment of overall risk and the prevalent cost of capital. Further, it should allow generation of reasonable surplus and attract investment for the growth of the sector. Para 5.8.4 of NEP, 2005 provides that Return on investment will need to be provided in a manner that the sector is able to attract adequate investments at par with, if not in preference to, investment opportunities in other sectors. To ensure that it is fair to both the investors and the consumers, the return allowed should be commensurate with the returns available from alternate investment opportunities having comparable risk. Power projects or Inter-State Transmission Lines are complex, capital intensive and require a higher gestation period of about 2 to 4 years. The equity deployment starts with land purchase & other development activities and debt is deployed only after investment approval. While interest on loan during construction period is considered as part of project cost, no ROE is allowed during the construction period which brings down the effective returns to the developer. The effective return reduces with delay in construction of the project which may be due to uncontrollable factors including challenges in RoW, topography etc. Even if delays are condoned, it pulls down the overall IRR of the project as no return on equity deployed during the construction period is permitted,. For a delay of 1 year, the effective rate of return reduces from 12.88 % to 11.9%. As delay increases, effective return further decreases as shown below: S. No. Delay in COD Effective ROE (%)* 1. No Delay 12.88 2. 1 year 11.99 3. 1 year (Cost overrun Gets below 10% disallowed in tariff) *Calculation provided at Annexure C Further, Transmission assets face a variety of risk as highlighted below: Construction Risk Execution of transmission projects face various risks during the construction period starting from land acquisition, environment, forest and other clearances, challenges related to obtaining Right of Way in varying terrain spanning across the length and breadth of the country and involving agencies across multiple states, Supply chain disruptions due to Force majeure and geo-political events etc. Recent experiences of stringent Environmental norms, GIB issue etc. has proven that risk of construction is increasing. Over the period, RoW issues have also increased due to various factors: Observations/Suggestions on Draft CERC (Terms and Condition of Tariff Regulation), 2024-29 34 1. Non-availability of Land 2. Procurement of Land 3. Statutory Clearances Since transmission utilities operate in a vastly distributed area, the RoW issues continues to be a major issue and needs to be managed spanning across various states and various jurisdictions. Operational Risk Considering frequent cyclones, natural calamity and climate change effect, Operational risks in transmission is also significant. The details of major disasters that has happened in last 5 years is provided below: 1. UP & Bihar Floods (2022) 2. Cyclone Asani (2022) 3. Assam Earthquake (2021) 4. Cyclone Gulab (2021) 5. Cyclone Tauktae (2021) 6. Cyclone Yaas (2021) 7. Maharashtra Floods (2021) 8. Cyclone Nisarga (2020) 9. Cyclone Nivar (2020) 10. Kerala, Assam & Hyderabad Floods (2020) 11. Karnataka & Kerala Floods (2019) 12. Cyclone Fani (2019) 13. Bihar Floods & heatwave (2019) Increased disputes and litigations especially regarding mismatch issues and Sharing mechanism involving Generators, Discoms, Other transmission licensees, STUs etc. has posed new uncertainty and risk on recovery of transmission charges. The returns for a Transmission Licensee must be in line with risk perception and market expectations and we feel that construction, operation and payment risks are more in transmission and only increasing day by day. B. No avenues for additional revenue from Transmission Business apart from Annual Fixed Charge (AFC) For Transmission, the upside revenue is capped i.e. maximum at an availability of 99.75% and there are negligible avenues to earn extra revenues. In case if availability goes below 98%, AFC decreases proportionally and there is no limit to downside. Further, unlike Transmission utilities, Generators have other avenues for additional revenue from Business. Hydro generators can earn additional revenues through the sale of secondary energy and additional revenue from overachievement of NAPAF, however, in case of underachievement, they are allowed to recover the total AFC. For thermal generation, they can earn additional revenue through Observations/Suggestions on Draft CERC (Terms and Condition of Tariff Regulation), 2024-29 35 Sale of unscheduled power in market, UI, sale of ancillary services, Efficiency gain in Controllable parameters i.e., Station Heat Rate; Secondary Fuel Oil Consumption; and Auxiliary Energy Consumption. Proceeds of carbon credit under Clean Development Mechanism Under SCED schemes, flexible operations based on GoI policy on flexibility. Furthermore, the Draft Regulations, 2024 propose the following incentives to generating stations: Additional Incentive of upto 1% of AFC based on frequency-based response, which will take into consideration generation as per system demand rather higher generation only. Incentive for excess generation (above normative PLF) during peak hours has been increased from 65 paise/kWh to

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