Objections/Suggestions on ARR/Tariff filings by APTransco

1
Objections/Suggestions onARR/Tariff filings by
APTransco DISCOMS

• Presentation by
• K. Raghu,
• Associate President,
• APSEB Engineers Association

2
This presentation consists of

• Violations observed in the Merit Order Dispatch
• Factors which may affect actual revenue gap
• Need for review of Power Purchase Agreements.
• Investments by APTransco/ DISCOMS and growing
  interest burden.
• Gas allocation and avoidable burden.
• PPA with APGENCO
• Reform Program
• Prayer to the Commission

3
Violations Observed in the Merit Order Operations

• Spectrum PPA- Section 3.10.2 (dealing with the
  Incentives) states that
• the Board shall pay for actual generation and
  Notional generation above the threshold level of
  a PLF of 68.49 an incentive in the nature of
  increased ROE in accordance with the following

4
Violations Observed in the Merit Order Operations

• PLF Level of Incentive
• PLFlt 68.5 None
• 68.5ltPLFlt 80.5 0.4 increase in ROE for every
• 1 increase in PLF above 68.5PLF
• 80.5ltPLFlt85.5 0.5 increase in ROE for every
• 1 increase in PLF above 68.5PLF
• gt85.5PLF 0.6 increase in ROE for every
• 1 increase in PLF above 68.5PLF

5
Violations Observed in the Merit Order Operations

• It also states that provided , however , that
  to the extent Notional generation contributes to
  achieving a PLF above 85 shall not be
  considered for the purpose of Payment of
  incentives
• Hence, incentive is part of Fixed cost upto the
  level of 85 PLF and it should be part of
  Variable Cost above 85 PLF.
• However, APTRANSCO treats the entire incentive as
  a part of Fixed cost.
• This is a clear violation of Merit Order
  Operations.

6
Violations Observed in the Merit Order Operations
Particulars 2000-01 2001-02 2002-03
Units Purchased 1543 1541 1504(?)
PLF 87.11 87.21 88.03
Incentive Paid _at_0.006 (Rs. Crs.) 13.16 13.24 13.82
If restricted to notional generation (Rs. Crs.) 9.728 9.728 9.728
Additional amount Paid (Rs.Crs.) 3.430 3.512 4.09
Var. Cost (Ps/Unit) above 85 PLF 175 173 163
7
Violations Observed in the Merit Order Operations

• Thus energy from IPPs has two tariffs for the
  merit order operations
• upto 85 PLF, where incentive has to be added to
  the Fixed cost
• above 85 PLF, where incentive has to be added to
  the Variable cost.
• It appears that the APTransco has not made this
  distinction.
• The same principle is applicable for the other
  IPP projects.

8
Violations Observed in the Merit Order Operations

• It is also not clear how Lanco project was paid
  incentive for the operations using Naphtha.
• APTransco has paid an amount of Rs 0.40 crore to
  the Lanco Kondapally project during 2002-03 as an
  incentive.
• Why incentive is paid for the operations
  involving alternate fuel?

9
Factors which may affect the actual revenue gap

• The total revenue gap projected by the APTRANSCO
  and DISCOMS is Rs 2882 Cr.
• Several factors, such as, change in consumer mix,
  fall in hydro generation are affecting actual
  revenue gap at the end of the Year, than what is
  projected at the beginning of the year.
• This year also some more factors are likely to
  increase the gap between the revenue and
  expenditure. They are

10
Factors which may affect the actual revenue gap

• 1. BST projected by APTRANSCO is Rs 2.07, where
  as the average power purchase cost shown by the
  DISCOMS is only Rs 1.961.
• Additional power purchase expenditure to the
  DISCOMs is 3802.7 X (2.07-1.961) Rs 414.49
  Crore.
• 2. Wheeling charges APTRANSCO claimed an amount
  of Rs 215 Crore from the proposed wheeling charge
  of Rs 1.00/ unit.

11
Factors which may affect the actual revenue gap

• This may not be realised, Since APTRANSCO in its
  proposal on wheeling charges has considered the
  component of power purchase cost to be average
  cost of its purchases from all the sources.
• However, this should be taken as the higher of
  the following two
• 1. Cost of Power purchase from the MOD.
• 2. Actual revenue that is realised for the
  additional units supplied to compensate for the
  losses to the Consumers of wheeled energy under
  the existing agreements.

12
Factors which may affect the actual revenue gap

• Also, the income from wheeling projected by the
  APTransco from the existing wheeling charges ( 13
  paise/ unit) should be deducted from the total
  revenue from wheeling charges, to arrive at
  additional revenue from the revised wheeling
  charges.
• We would like to know from the Licensee
• what is the amount of energy consumed by the
  wheeled consumers, above their allocated share?
• And what is the amount realised from this
  additional energy sold to these consumers at
  present?

13
Factors which may affect the actual revenue gap

• We feel APTRANSCO may not realise the amount
  projected in the ARR, as the amount collected
  would not be sufficient to meet the additional
  liability due to the burden of loss compensation.
• 3. No returns APTransco and DISCOMS have not
  claimed any returns for its operations for the
  current and ensuing years.
• APTransco/DISCOMS have claimed that they would
  forego returns with the intention to keep any
  tariff increases required to bridge the gap to
  minimum and unavoidable levels only.
• It is not necessary for APTransco to play the
  role of the Govt. and forego legitimate claims on
  revenue requirements.
• If govt. decides not to place any additional
  burden on the Consumers, it should compensate for
  the gap in the form of additional subsidy.

14
Factors which may affect the actual revenue gap

• The purpose of Reforms is to run the Licensees on
  commercial lines.
• This is also against the ESA, 1948 , which
  provides for the min. ROR of 3 on net fixed
  assets.
• This amount is approximately equal to Rs 200
  crore.
• 4. Dismantling of Administered Pricing Mechanism
• Govt. has decided to dismantle the APM for LNG
  and petrolium products.
• If APM is dismantled for Natural gas , the
  additional burden on APTRANSCO is more than Rs
  550 crore, as all the IPP projects are gas based
  ones.
• 5. 24 Hour supply to Rural consumers APTransco
  has announced that it will supply electricity to
  rural consumers 24 Hours a day from Aug 2002.

15
Factors which may affect the actual revenue gap

• This will increase the burden of power purchase
  to APTransco without commensurate returns from
  these consumer categories.
• The loss due to supply of electricity to the
  subsidized sections is of the order of Rs 100
  Crore.( Assuming the cost to serve to be Rs
  4.50/unit and realisation of Rs 1.50 / unit, and
  total additional supply to rural consumers is
  about 300 MU)
• 6. Revenue from inter-state sales
• APTransco has claimed that it may realise Rs 350
  Crore from inter-state sales.
• This may not be realised, considering the fact
  that already many states are facing the problem
  of surplus energy.

16
Factors which may affect the actual revenue gap

• We request the Licensee to declare the plans of
  Inter state sales.
• In this connection, We also request the Licensee
  to study the impact of third party sales out side
  the state as allowed in the MOAs for the some
  short gestation projects, on its future marketing
  plans.
• The shortfall from inter state sales will be of
  the order Rs 100 Cr.

17
Factors which may affect the actual revenue gap

• Thus the total short fall in revenue
• Projected by LicenseesRs 2882 Cr
• Under estimation of BSTRs 414 Cr.
• Additional burden due to
• new wheeling proposal..Rs 250 Cr.
• RoR..Rs 200 Cr.
• Dismantling of APM..Rs 550 Cr.
• 24 Hrs supply to rural consumer..Rs 100 Cr.
• Short fall from inter state salesRs 100 Cr.
• 
  ----------------------
• Total Revenue gap.. Rs Rs
  4496 Cr
• 
  ----------------------

18
Factors which may affect the actual revenue gap

• Other factors which are affecting(increasing )
  the expenditure and revenue of The Licensees
  every year
• Fall in revenue due to
• Change in consumer mix.Rs 150 Cr
• Shortfall in Hydel generationRs 150 Cr
• There are several Other factors( Say impact of
  ABT regime, consumer resistance to tariff hike),
  which may adversely affect the Licensees
  revenues.
• Thus, the revenue gap for the Licensee for the
  FY 2003 may vary between Rs 4000 Crore to Rs 5000
  Crore.

19
Factors which may affect the actual revenue gap

• APTRANSCO/ DISCOMS propose to bridge the above
  gap through tariff hike and subsidy from the
  govt.
• The additional revenue from the tariff hike is
  about Rs 481 Crore. This can only meet 16.6 of
  the total gap projected by the APTRANSCO and if
  all other factors mentioned above are also
  considered, this amounts to only 10.
• Thus the substantial amount should come from the
  Govt in the form of subsidy.

20
Factors which may affect the actual revenue gap

• It is very clear from the above that tariff hike
  can not be the solution for the present crises
  faced by the Licensees, and we should identify
  the causes for the present situation and try to
  address them.
• Blind pursuance of the reform program, without
  understanding the nature and working of the power
  sector and ignoring the social realities will
  only land us in a Orissa like situation.

21
Need for review of PPAs

• There is a need for review of all Power Purchase
  Agreements with the IPPs for the following
  reasons
• 1. Violation of GOI norms For ex while the GOI
  guidelines provide for 16 return on equity for
  the entire year, the IPPs are being paid the
  above amount in 12 equal parts on monthly basis .
  This is resulting in additional payment to the
  IPPs.
• 2. Harmful provisions in the PPA
• Comptroller and Auditor General in its reports
  on GVK and Spectrum projects has identified
  several provisions which are harmful to the
  consumers, and recommended for the review of
  these PPAs.

22
Need for review of PPAs

• The Commission has also agreed with some of the
  above issues raised in its order on PPA between
  APTRANSCO and BPL Project.
• Godbole committee also had identified several
  issues which burden the consumers. For ex Fuel
  arbitrage I.e. difference between the cost of
  fuel actually consumed and as provided in the PPA
  based on calorific value.
• Inflated Capital costsFor similar capacity of
  projects, there is abnormal difference with
  regard to the capital cost.
• For Ex BSES 220MWRs 700 Crore.
  
• GVK 216MWRs 870
  crore.
• 
  Spectrum.208MW748 Crore.

23
Need for review of PPAs

• The BSES project is a new project and GVK and
  Spectrum projects are completed long ago, still
  having higher capital cost. The above figures may
  further go up if revised capital cost proposals
  are approved by the CEA.
• Even the purchase of energy based on uniform
  fixed cost / unit , as provided in PPAs with
  short gestation projects appear to be on higher
  side.
• 3. Interest rates offered by the financial
  institutions have drastically reduced. Hence this
  may be taken into consideration to restructure
  the debt portion of the capital cost of IPPs to
  minimise the Forex risk and lessen the debt
  repayment obligation.
• In view of the above, we request the Commission
  to review all the PPAs with IPPs.

24
Why APTransco is sympathetic to IPPs?

• 1. Wheeling charges
• APTRANSCO has requested the Commission to
  approve a wheeling charge of Rs 1.00/ unit.
• This is based on its expenditure for the year
  2001-02.
• The actual expenditure for the year 2001-02 is
  more than approved by the Commission, and the
  expenditure for the year 2002-03 has further gone
  up.
• It is not clear why APTRANSCO has preferred not
  to claim revised wheeling charge based on the
  revised expenditure.
• Moreover, in the original proposals on wheeling
  charges APTRANSCO has not taken burden of cross
  subsidy into consideration.

25
Why APTransco is sympathetic to IPPs?

• 2. Fixed charge for GVK and Spectrum projects
• APTRANSCO has stated that it is adopting the
  existing fixed cost level of Rs 195 crore for GVK
  project and Rs 183 crore for the Spectrum project
  for the ensuing year also.
• This is in view of the revised proposals
  submitted by the IPPs to the CEA for the fixed
  cost revision.
• If the revised fixed cost is not approved by the
  CEA, this will result in higher payments to
  theIPPs in the form of interest on these
  additional amounts paid.
• 3. Incentive payments to the Lanco project
• APTransco has paid an amount of Rs 0.40 crore as
  incentive to the Lanco for the units produced
  with fuel Naphtha.
• What is the need to pay incentives when energy is
  produced with alternate fuel?

26
Investments and Growing interest Burden

• Interest payments approved by
  APERC for the year 2001-02 Rs 470 crore.
• Revised estimate of interest
  payments for the year
  2001-02 Rs 495 Crore.
• Interest payment projected for
• the year 2002-03Rs 730 Crore.
• From the above it is clear that the burden of
  interest is growing year after year on APTRANSCO.

27
Investments and Growing interest Burden

• We feel this burden is due to the investments
  made by the APTRANSCO which are not prudent.
• For Ex For the year 2002-03 APTRANSCO has
  proposed the following investments
• On BPL Transmission Scheme..Rs 50 crore.
• On Krishnapatnam Transmission scheme ..Rs 40
  crore.
• On SGP-I Rs 50 crore
• On SGP-IIRs 20 crore.

28
Investments and Growing interest Burden

• Among the above projects,
• PPA with BPL has not been consented to by the
  Commission.
• PPAs with Krishnapatnam and other SGP projects
  have not been approved by the Commission yet.
• In light of the revised load forecasts, the need
  for above schemes is to be examined.
• Also, in its strategy paper on Power, Govt. of AP
  claimed that Rs 890 Crore is requiered to reduce
  1 technical loss.

29
Investments and Growing interest Burden

• The reduction in power purchase
• cost due to the above is ..Rs.80 crore.
• However, the interest burden on the investments
• is(_at_16 rate of interest...Rs 134 crore.
• If investments are made in the name of system
  improvements, future capacity requirements
  etc,...without regard to returns from these
  investmentsthe entire system may collapse unable
  to recover the costs.

30
Investments and Growing interest Burden

• Even in Orissa huge investments are made on
  Transmission and Distribution network, but failed
  to recover the costs leading to collapse of the
  entire system.
• In view of the above, we request the Commission
  to review the entire investment of APTRANSCO and
  Discoms.

31
Gas allocation-avoidable burden

• The discrimination shown in allocation of gas had
  adversely affected the finances of the Licensee
  and resulted in additional burden on the
  consumers.
• Non-existing projects like GVK (extension),
  Konaseema, Vemagiri and Goutami have been
  recommended by the Govt. AP for allocation of gas
  and have subsequently been awarded firm
  allocation by the GOI.
• On the other hand, existing plants like APGPCL,
  Lanco Kondapally do not have firm allocation to
  their full capacity, forcing them to depend on
  alternate fuel like Naphtha, resulting in higher
  variable cost.
• The additional burden due to non-availability of
  gas to Lanco project is Rs 234 Crore from Lanco
  project alone.

32
Gas allocation-avoidable burden

• Hence huge savings can be achieved if gas is
  allocated to the existing projects.
• In light of the above, we request the Commission
  to direct the Govt of AP to recommend GOI to
  re-allocate gas to existing plants from
  non-existing plants which have already obtained
  gas allocation on firm basis.
• In the event of firm allocation of gas to these
  existing projects based on Govt. recommendations,
  the PPAs may be revised to see that no incentives
  are paid for extra PLFs that are achieved with
  the availability of additional gas.

33
PPA with APGENCO

• At present APGENCO is not allowed to get ROE,
  incentives and recover depreciation from the sale
  of energy to APTRANSCO.
• It is stated that the above practice may be
  continued for the next year, except that the
  depreciation may be allowed to the extent of debt
  redemption obligations.
• This is not in the interest of the APGENCO which
  is the best performing utility in the country.
• For IPPs whose cost of supply of energy is much
  higher than the APGENCO are allowed to get all
  the above benefits.

34
PPA with APGENCO

• Lanco project got an incentive for producing
  energy at Rs 5.93 / unit making mockery of the
  very word incentive.
• On the other hand , APGENCO units which are
  achieving national awards for their performance
  are facing the threat of Closure/ backing down.
• Hence, we request the Commission to put an end to
  this discriminatory treatment and allow the
  APGENCO to function on commercial lines.
• A portion of variable cost from APGENCO units may
  be treated as Incentive to be included in the
  Fixed cost to protect the highly efficient
  APGENCO units from the threat of closure/ backing
  down.

35
Allow Returns to APTRANSCO and DISCOMS

• APTransco and DISCOMS have not claimed any
  returns for their operations for the current
  and ensuing years.
• APTransco/DISCOMS have claimed that they would
  forego returns with the intention to keep any
  tariff increases required to bridge the gap to
  minimum and unavoidable levels only.
• It is not necessary for APTransco to play the
  role of the Govt. and forego legitimate claims on
  revenue requirements.
• If govt. decides not to place any additional
  burden on the Consumers, it should compensate for
  the gap in the form of additional subsidy.

36
Allow Returns to APTRANSCO and DISCOMS

• The purpose of Reforms is to run the Licensees on
  commercial lines.
• This is also against the ESA, 1948 , which
  provides for the min. ROR of 3 on net fixed
  assets.
• Even the performance of APTRANSCO and DISCOMS on
  revenue front is exceptional, taking the total
  revenue collections from about Rs 4800 crore to
  Rs 6226 crore in two years.
• However the financial crises faced by the
  Licensees is due to the factors which are beyond
  its control and lie with the Reform program
  initiated by the Govt. of AP.
• Hence, Licensees should be allowed to get Returns.

37
Some important Issues

• Government subsidy
• The Commission in its Tariff Order for 2001-02
  directed the Govt of AP, to provide subsidy to
  the DISCOMS directly in view of the proposed
  Privatisation of distribution to avoid cash flow
  problems to the future private companies.
• However, in view of the experience of Orissa,
  where the private Distribution companies
  defaulting payment to the Gridco, it is interest
  of the Consumers to route the Govt subsidy
  through the APTRANSCO.

38
Some important Issues

• 2. Variable cost of RTS of APGENCO and NPTCs
  Ramagundam station
• It is not clear how the variable cost of NTPCs
  Ramagundam station is Rs 1.49/ unit where as the
  variable cost of RTS of APGENCO is only Rs 1.02/
  unit, since both the stations are located in the
  same region.
• Moreover, NTPCs station is large in capacity
  which should have resulted in lowering of
  variable cost.

39
Some important Issues

• 3. The Commission has imposed ban on third party
  sales to protect the interests of the consumers.
• The purpose of the above ban is to prevent the
  subsidizing sections from leaving the APTRANSCOs
  fold.
• It is strange that APTRANSCO has projected cost
  of supply from LVS power at Rs 9.74/ Unit for the
  current year, and it proposes to pay an amount of
  Rs 35 Crore towards fixed charges without
  purchasing a single unit from the MPP.
• Thus the purpose of imposing the ban got
  defeated, and is only helping the private
  parties.
• We request the Commission to see that the
  decision to ban third party sales will not harm
  the interests of the Licensee and the consumers.

40
Some important Issues

• MOAs with Financial Institutions
• The contents of the MOAs signed by the Govt of AP
  and APTRANSCO with the financial institutions in
  favour of Gas based projects are not made public.
• It is not clear whether the APTRANSCO has taken
  approval from the Commission to sign the above
  MOAs.
• It was admitted by the CMD/APTRANSCO in one of
  the public hearings conducted by the Commission
  that the MOAs allowed for the third party sales
  outside state, and he also stated that the above
  matter is not within the jurisdiction of the
  APERC as the sales are outside the state.

41
Some important Issues

• Now, APTRANSCO proposes to sell the surplus power
  outside the state, and obviously the above third
  party sales allowed in the MOAs will affect the
  marketing plans of APTRANSCO to other States.
• Thus, any matter which affect the finances of
  APTRANSCO and the Discoms should come under the
  purview of the Commission.
• Hence, we request the Commission to review the
  MOAs signed by the Govt. of AP and APTRANSCO with
  the Financial Institutions.
• We also request the Commission to direct the
  Licensee to make the above MOAs available to the
  Petitioner.

42
Reform Program

• SINGLE BUYER MODEL

CGS
C O N S U M E R S
IPPs
(APSEB single buyer)
captive
others
43
Reform Program

• MULTI BUYER MODEL

CGS
DISCOM1
W H O L E S A L E C O M P E T I T I O N
C O N S U M E R S
IPPs
DISCOM2
DISCOM 3
AP GENCO
DISCOM 4
others
APTRANSCO RESTRICTED TO WHEELING ONLY
44
Orissa Experience with the Model

• The proposed World Bank Model failed to achieve
  its goals and miserably failed in Orissa.
• Discoms have defaulted in payments to Gridco.
• No fresh investments have come.
• Failed to check Commercial losses leave alone
  technical losses.
• Consumer service deteriorated.
• Rural consumers are the worst sufferers of the
  privatisation program.

45
Orissa Experience with the Model

• Competition remained a myth.
• Distribution companies tried to hide their
  profits and actual reduction of losses.
• Benefits of efficiency improvements have not
  percolated to the consumers.
• Private Discoms inflated their costs. For ex
• cost of Earth rod which was about Rs 400/- prior
  to reforms was inflated to Rs 40000/- after
  reforms.(MPSEB Engineers Association Report).

46
Orissa Experience with the Model

• In the absence of real competition and effective
  check from civil society institutions and
  consumers, private companies exploited the
  consumers.

47
Whither Andhra Pradesh Power Sector?

• GoAP in its strategy paper on Power, has stated
  that it will privatise atleast one distribution
  company during 2002-03.
• If the Govt. goes ahead with the privatisation
  policy, the power sector of AP will get into much
  bigger crises.
• In view of the above, we request the Commission
  to recommend to the Govt. of AP to review the
  entire reform process, and make amends wherever
  necessary.

48
Prayer to the Commission

• We request the Commission to
• To review the Merit Order Operations.
• To consider all the factors which will increase
  the revenue gap, and direct the Govt. to
  compensate APTRANSCO/DISCOMS with suitable
  subsidy.
• To review all the existing PPAs with the IPPs.
• To review the investments that are being made as
  part of the Reform Program.
• To review the MOAs signed by the Govt. of AP and
  APTRANSCO with the Financial Institutions.
• Not to discriminate APGENCO and allow returns to
  APTRANSCO and DISCOMS.
• To recommend to the Govt. of AP to review the
  entire reform program and make suitable amends
  wherever necessary.

49
Thank you
APSEB Engineers Association