Before the MAHARASHTRA ELECTRICITY REGULATORY by wuzhenguang

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									                                      Before the
         MAHARASHTRA ELECTRICITY REGULATORY COMMISSION
     World Trade Centre, Centre No.1, 13th Floor, Cuffe Parade, Mumbai – 400 005
                          Email: mercindia@mercindia.org.in
                           Website: www.mercindia.org.in


                                      Case No. 49 of 2005


                                IN THE MATTER OF
        Determination of Annual Revenue Requirement (ARR) for FY 2006-07 for
         Maharashtra State Electricity Transmission Company Ltd. (MSETCL)


                                   Dr. Pramod Deo, Chairman
                                  Shri A. Velayutham, Member
                                  Shri S. B. Kulkarni, Member


                                                              Date of Order: 28th June 2006


                                          ORDER

Upon directions from the Maharashtra Electricity Regulatory Commission (Commission),
Maharashtra State Electricity Transmission Company Limited (MSETCL), submitted its
application for approval of Annual Revenue Requirement and Tariff Petition for 2006-07,
under affidavit. The Commission, in exercise of the powers vested in it under Section 61 and
Section 62 of the Electricity Act, 2003 (EA 2003) and all other powers enabling it in this
behalf, and after taking into consideration all the submissions made by MSETCL, all the
objections, responses of the MSETCL, issues raised during the Public Hearing, and all other
relevant material, determines the ARR for transmission of electricity by the Maharashtra State
Electricity Transmission Company Limited as under.

BRIEF HISTORY:
The Maharashtra State Electricity Transmission Company Limited (MSETCL or Maha
TRANSCO) is a Company formed under the Government of Maharashtra General Resolution
No. ELA-1003/P.K.8588/Bhag-2/Urja-5 Dated January 24, 2005 with effect from 6th June
2005 according to the provisions envisaged in the Electricity Act 2003. The MSETCL has
been registered with the Registrar of Companies, Mumbai on 31st May 2005 bearing
certificate U40109 MH 2005 PLC 153646 under the Companies Act, 1956.
The provisional Transfer Scheme was notified under Section 131(5)(g) of the EA 2003 on 6th
June 2005, which resulted in the creation of 4 successor companies to erstwhile Maharashtra
State Electricity Board (MSEB), namely,

q MSEB Holding Company Ltd.,
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q Maharashtra State Power Generation Company Ltd.,
q Maharashtra State Electricity Transmission Company Ltd. and
q Maharashtra State Electricity Distribution Company Ltd.
MSETCL is in the business of transmission of electricity and has also been notified as the
State Transmission Utility (STU) as per Section 39 of the EA 2003. MSETCL has filed an
application for approval of Annual Revenue Requirement (ARR) and Tariff for FY 2006-07,
on 13th February 2006, under affidavit, before the MERC, in accordance with the provisions
of the Electricity Act, 2003.

The Commission observed certain inconsistencies and data gaps in the MSETCL ARR
Petition submitted and asked MSETCL to submit additional data and clarifications required,
so that it could conduct a technical validation session. Thereafter, MSETCL submitted
clarifications and additional data vide letter dated 25th April 2006.

The Commission held a Technical Validation Session in the presence of authorized consumer
representatives and others on 26th April 2006 (the list of persons who attended the Technical
Validation Session is given in Appendix 1).

During the Technical Validation session, several discrepancies and data inconsistencies/ gaps
were identified/ pointed out and the Commission directed MSETCL to submit the additional
data and clarifications.

MSETCL submitted the additional data and clarifications subsequently. Upon scrutiny of the
additional data received, the Commission observed certain inconsistencies and requested
MSETCL for further clarifications.

In addition, there were inconsistencies observed in the 3 year Infrastructure Rolling Plan
submitted by MSETCL, and the Commission requested MSETCL for additional data
pertaining to the 3 year Infrastructure Rolling Plan.

Subsequently, MSETCL, vide letter Ref. MSETCL/ARR/MERC/Petition/5307, submitted
their Comprehensive ARR and Tariff Petition (Petition) for FY 2006-07 on 23rd May 2006
under affidavit.

Subsequently, based on the instructions from the Commission, a Public Notice appeared in
newspapers on May 23, 2006 giving a period of 3 weeks to the public to file their objections.
The Public Notice was published in the Saamna, Lokmat, Hitwad, Sakal, Ratnagri Times,
Gavkari and Loksatta (in Marathi); and Indian Express and Hindustan Times (in English).

Copies of MSETCL’s Petition and its summary were made available for inspection/ purchase
to the public at MSETCL’s Head Office and 5 Zonal Offices and on MSETCL’s website
(www.mahatransco.in). The last date for filing the written objections was fixed as June 9,
2006, which allowed a period of three weeks to the public to enable them to file their
objections. The Public Notice specified that the suggestions/objections, either in English or
Marathi, may be filed in the form of affidavits to the Commission along with proof of service
on the applicant M/s MSETCL. It was specifically stated in the Public Notice that if any
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objector wanted to be heard in person, the Commission would give him an opportunity at the
Public Hearing and others were also free to attend the same. MSETCL was given an
opportunity to reply to the party's suggestion/objection by June 12, 2006.

The Commission also admitted objections filed during the Public Hearing.

The Commission received written objections and comments regarding the ARR of MSETCL,
transmission losses, capital expenditure, expenses of MSETCL and a host of other issues. The
Commission received objections/ comments from a total of four (4) objectors, out of which
one was on affidavit and three were without affidavits. In the interest of the process and to
ensure adequate public participation, the Commission has considered the objections, even
though they have not been submitted on Affidavit. The objectors, who indicated that they
would like to be heard in person, were called for the Public Hearing. The Public Hearing was
held on June 13, 2006 at 15:00 hours, at Centrum Hall, Centre I, World Trade Centre,
Mumbai.

The list of persons who attended the Public Hearing is given in Appendix 2.

Based on various objections received, the Commission directed MSETCL to submit
additional data/ clarifications as agreed during the course of the Public Hearing. MSETCL
submitted the additional data/ clarifications vide their letters dated 19th June 2006 and 20th
June 2006.

Further, the Commission requested MSETCL to submit additional data and clarifications with
respect to the ARR and tariff proposal, which were subsequently submitted by MSETCL vide
letters dated 19th June 2006 and 21st June 2006.

The Commission has ensured that the due process contemplated under law to ensure
transparency and public participation, has been followed at every stage meticulously and
adequate opportunity was given to all the persons concerned to file their say in the matter.

The Commission, after taking into consideration all the objections, including the submissions
and responses of the MSETCL, issues raised during the Public Hearing, and all other relevant
material, issued the Detailed Order on June 28, 2006. The salient features of the Detailed
Order are as follows:

1. The ARR Order for FY 2006-07 will be valid till 31st March 2007.

2. For projecting the energy transmitted by MSETCL, the Commission has considered the
   transmission losses as 4.60% for FY 2004-05 and FY 2005-06, based on the findings of
   the load-flow study commissioned by MERC and considering certain limitations in the
   study report and also taking into account the norms adopted in other transmission systems
   e.g. Andhra Pradesh and Karnataka. For FY 2006-07, keeping in view the additional
   power coming from the Eastern corridor and certain uncertainties in the western corridor
   generation (e.g. Koyna Hydroelectric generation and DPC), the energy losses are bound
   to increase, therefore the Commission has considered the transmission losses for
   MSETCL at 4.85% for FY 2006-07. The Commission has considered the MSEDCL’s

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Case No. 49 of 2005                                    MERC ARR Order for MSETCL for FY 2006-07


    energy requirements as given in the ARR Petition of MSETCL (The energy requirement
    figures may undergo a change once the Commission’s ARR and Tariff Order for
    MSEDCL for FY 2006-07 is finalized).

3. The Commission has projected the employee expenses for FY 2005-06 and FY 2006-07
   by applying a 5-year CAGR to employee expenses of the previous year. The increase in
   employee expenses has been allowed by the Commission for increase in DA, annual
   increments, etc. and not for additional employees.

4. The Repairs and Maintenance (R&M) expenses have been computed by the Commission
   on the basis of the average R&M expenses of the Transmission function/ MSETCL as a
   percent of opening GFA for past 3 years.

5. For estimating the Administration and General (A&G) expenses for FY 2005-06, the
   Commission has considered a year-on-year (YoY) increase of 4.21% over the A&G
   expenses as approved by the Commission for FY 2004 in its Tariff Order dated 10th
   March 2004 for MSEB as a whole. For estimating the A&G expenses for FY 2006-07, the
   Commission has considered a year-on-year (YoY) increase of 4.21% over the A&G
   expenses of the previous year.

6. The Commission has computed depreciation for FY 2005-06 in line with the principles
   enunciated in the Tariff Order dated 10th March 2004 for MSEB as a whole. The actual
   depreciation charged over the past three years as a percentage of the opening gross block
   of assets of the Transmission function/ MSETCL works out to 5.99% on an average, and
   the Commission has applied this percentage to arrive at the allowable depreciation for FY
   2005-06. The Commission has computed the depreciation for FY 2006-07, in line with
   the MERC (Terms and Conditions of Tariff) Regulations, 2005.

7. The Commission has projected Advance against depreciation for FY 2006-07 as per the
   MERC (Terms and Conditions of Tariff) Regulations, 2005. The Advance against
   depreciation has been computed as the difference between the loan repayment (as
   recomputed by the Commission) for the year and the depreciation expense for the year.

8. For the purpose of ARR computation, the Commission has considered an average of the
   fixed asset capitalization in the past 2 years, as allowable capital expenditure for FY
   2006-07. The 3-year Infrastructure Rolling Plan submitted by MSETCL is under
   examination and review of the Commission.

9. In order to compute the interest on loans, the Commission has considered the loan balance
   outstanding of MSETCL (as per the Balance Sheet as on 31st March 2004) as per the
   provisional Transfer Scheme as the Opening loan balance in FY 2004-05. Considering
   this as the opening loan balance in FY 2004-05, various adjustments have been made
   while computing the interest and loan for subsequent years, viz. DPC loans have been
   disallowed, loans held by the MSEB Holding Company (which have not been allocated to
   the successor companies) have been disallowed, loan drawal/ additional loans have been
   allowed only to the extent of capitalization of fixed assets, loan repayments have been
   adjusted in case of loans disallowed, etc. The Commission has considered the average
   interest rate for each year as given by MSETCL in its Petition.

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10. The Commission has allowed the Other Interest and Finance charges as projected by
    MSETCL for FY 2005-06 and FY 2006-07.

11. The Commission has estimated the working capital requirement of MSETCL for FY
    2005-06, in line with the Commission’s computation in the previous Tariff Order for
    MSEB as a whole. For FY 2006-07, the Commission has computed interest on working
    capital as per the MERC (Terms and Conditions of Tariff) Regulations, 2005. The
    working capital interest rate has been considered as 10.25%.

12. The other expenses comprising the loss/ gain on exchange rate variations on the foreign
    currency loans as projected by MSETCL has been allowed by the Commission.

13. The Commission has approved the income tax amount for FY 2005-06, as this is based on
    actual advance tax paid by MSETCL to the Income Tax authorities for the year. For FY
    2006-07, the Commission has considered the income tax as ‘Nil’ as no advance tax has
    been paid by MSETCL to the Income Tax authorities so far (as per the submissions of
    MSETCL till date). Further, as erstwhile MSEB has accumulated financial losses of Rs.
    1,872 Crore (as per the MSEB Accounts as on 31st March 2005), the tax losses on account
    of depreciation and operations would also be significant, and thus, there would be no
    income tax payable in FY 2006-07.

14. The Commission has disallowed the contingency reserve amount projected for FY 2005-
    06, as there was no provision for the same in the earlier MSEB Tariff Order (Case No. 2
    of 2003 dated 10.03.2004) and the MERC (Terms and Conditions of Tariff) Regulations,
    2005 are applicable while approving the ARR from FY 2006-07. The Commission has
    allowed the contribution to contingency reserves as projected by MSETCL for FY 2006-
    07, as this is as per the MERC (Terms and Conditions of Tariff) Regulations, 2005.

15. The Commission has allowed the non-tariff income projected by MSETCL for FY 2005-
    06 and FY 2006-07.

16. The Commission has allowed a Return of 4.5% on the Net Fixed Assets of MSETCL for
    FY 2005-06, as this is in line with the principles of the earlier Tariff Order for MSEB as a
    whole. For FY 2006-07, the Commission has computed the Return on Equity as per the
    MERC (Terms and Conditions of Tariff) Regulations, 2005.

17. The Annual Revenue Requirement (ARR) allowed by the Commission amounts to Rs.
    1,432.57 Crore and Rs. 1,393.14 Crore for FY 2005-06 and FY 2006-07 respectively.

18. The Commission has issued its Order in respect of the intra-state transmission pricing
    framework in Case No. 58 of 2005 on 27th June, 2006. The ARR as approved by the
    Commission for MSETCL for FY 2006-07 in this Order, will be used as a part of
    composite ARR determination process of the complete intra-state transmission system of
    all transmission licensees in the State for FY 2006-07. Hence, in this Order the
    Commission has only determined the ARR for MSETCL for FY 2006-07 and not
    determined any transmission tariff for MSETCL alone. Revenue for MSETCL for FY
    2006-07 will be as per the tariff to be determined by the Commission under its Order on
    intra-state transmission pricing framework.

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Case No. 49 of 2005                                    MERC ARR Order for MSETCL for FY 2006-07


19. The Commission has approved the SLDC budget for Rs. 15.51 Crore for FY 2006-07
    (vide its Order dated 16th May 2006 in Case No. 30 of 2005). The Commission directs
    that the SLDC Budget approved by the Commission will be treated separately and will
    not be included as a part of the MSETCL ARR for FY 2006-07. The SLDC budget will be
    separately recovered from MSEDCL for FY 2006-07.

20. The Commission has instituted a truing up process where in the actual expenses and the
    actual revenue will be trued up at the end of the year based on audited financial results
    and subject to a prudence check.



Table 1: Annual Revenue Requirement for FY 2005-06 and FY 2006-07
                                                                        Rs. Crore
                                                    FY 2005-06         FY 2006-07
                       Particulars               ARR      MERC       ARR       MERC
                                                Petition Approval Petition Approval
   Operation & Maintenance Expenses                410.13    375.55   467.08      388.09
   Employee Expenses                               264.28    289.66   297.13      303.96
   Administration & General Expenses                40.99      25.08   43.03       24.53
   Repair & Maintenance Expenses                   104.86      60.81  126.92       59.60
   Depreciation, including advance against
   depreciation                                    491.78    498.09      465.07     302.59
   Interest on Long-term Loan Capital              429.01    289.14      428.56     275.40
   Other Interest & Finance Charges                 30.42     30.42       30.42      30.42
   Working Capital interest                         26.08        -        29.73      23.14
   Other Expenses (loss on exchange rate
   variations)                                      -0.28      -0.28       1.41       1.41
   Income Tax                                       41.01      41.01      41.99         -
   Contribution to contingency reserves             41.61         -       42.26      42.26
   Total Revenue Expenditure                     1,469.76   1,233.93   1,506.52   1,063.33
   Return on Equity Capital                        206.24     206.24     354.35     336.34
   Aggregate Revenue Requirement                 1,676.00   1,440.17   1,860.87   1,399.66
   Less: Non Tariff Income                           7.60        7.6       6.52       6.52
   Aggregate Revenue Requirement                 1,668.40   1,432.57   1,854.35   1,393.14




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Case No. 49 of 2005                                      MERC ARR Order for MSETCL for FY 2006-07




ORGANISATION OF THE ORDER

The Order of the Commission regarding the determination of ARR is broadly divided into
three parts.

The first part of the Order, given in the previous pages, consists of a brief history of the ARR
determination process and the subsequent quasi-judicial process undertaken by the
Commission. It also gives the salient features of the Detailed Order. For the sake of
convenience, a list of abbreviations with their expanded forms is appended at the end of this
Part.

The second part of the Order lists out the various objections raised by the objectors in writing
as well as during the Public Hearing before the Commission. They have been broadly
categorized into five issues. The various objections have been summarized, followed by the
response of MSETCL and the rulings of the Commission on each of the points have also been
given.

The third part of the Order comprises the Commission's analysis and its decisions on
MSETCL's ARR and Tariff Petition for FY 2006-07. It enumerates the projections of energy
transmitted, expenses permitted by the Commission, and other issues involved.




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Case No. 49 of 2005                                           MERC ARR Order for MSETCL for FY 2006-07



List of Abbreviations used in the ARR Order

  ABT                             Availability Based Tariff
  A&G                             Administration & General Expenses
  AAD                             Advance Against Depreciation
  ARR                             Annual Revenue Requirement
  BPTA-IS                         Bulk Power Transmission Agreement (Intra-State)
  CAGR                            Compounded Annual Growth Rate
  CERC                            Central Electricity Regulatory Commission
  Commission/ MERC                Maharashtra Electricity Regulatory Commission
  CPI                             Consumer Price Index
  CPRI                            Central Power Research Institute
  Cr                              Crore
  DA                              Dearness Allowance
  EA 2003/ Act                    Electricity Act, 2003
  EHV                             Extra High Voltage
  FY                              Financial Year
  GFA                             Gross Fixed Assets
  GoM                             Government of Maharashtra
  HVAC                            High Voltage Alternating Current
  HVDC                            High Voltage Direct Current
  KEA                             Kolhapur Engineering Association
  kV                              Kilo Volt
  kW                              Kilo Watt
  MEL                             Maharashtra Elektrosmelt Ltd.
  MoP                             Ministry of Power
  MSEB                            Maharashtra State Electricity Board
  MSETCL                          Maharashtra State Electricity Transmission Company Limited
  MSEDCL                          Maharashtra State Electricity Distribution Company Limited
  MSPGCL                          Maharashtra State Power Generation Company Limited
  MU                              Million Units (MkWh)
  MVA                             Mega-Volt Ampere
  MW                              Mega Watt
  MYT                             Multi Year Tariff

Introduction & Salient Features                                                             Page 8 of 8
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Case No. 49 of 2005                                            MERC ARR Order for MSETCL for FY 2006-07


  NFA                             Net Fixed Assets
  NTPC                            National Thermal Power Corporation
  R&M                             Repairs & Maintenance
  RoE                             Return on Equity
  Rs.                             Indian Rupees
  RLDC                            Regional Load Despatch Centre
  SLDC                            State Load Despatch Centre
  STU                             State Transmission Utility
  TBIA                            Thane Belapur Industries Association
  TPC                             Tata Power Company
  Y-o-Y                           Year-on-Year




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Case No. 49 of 2005                                                           MERC ARR Order for MSETCL for FY 2006-07



PART II: OBJECTIONS RECEIVED, MSETCL’S RESPONSE AND THE
COMMISSION’S RULING.............................................................................................. 12
1. ACCURATE ENERGY ACCOUNTING AND LOSS ESTIMATION ..................... 12
2. TRANSMISSION LOSSES ........................................................................................ 14
3. EXPENDITURE ......................................................................................................... 16
     3.1      Advance Against Depreciation ............................................................... 16
     3.2      Capital Expenditure................................................................................ 16
     3.3      Employee Expenditure............................................................................ 18
     3.4      Administration and General (A&G) Expenses ...................................... 20
4. TARIFF RELATED ISSUES ..................................................................................... 21
     4.1 Cash flow of MSETCL............................................................................ 21
5. OTHER OBJECTIONS/ ISSUES............................................................................... 21
     5.1 Re-computation of the ARR on the basis of MERC norms................... 21
     5.2 Contractual protections .......................................................................... 23
     5.3 Transmission Capacity Utilisation of MSETCL Network..................... 24
     5.4 Transparency .......................................................................................... 26
     5.5 Lower Capacity Additions/ Capital Expenditure in high load density
         areas like Kalwa and Aurangabad Circles............................................. 26
     5.6 Data on energy units handled by transmission network for MSEDCL
         apart from that generated by MSPGCL ................................................ 27
6. REPLIES BY MSETCL TO SPECIFIC DIRECTIVES BY THE COMMISSION
   DURING THE PUBLIC HEARING.......................................................................... 27


PART III: COMMISSION’S ANALYSIS AND DECISION                                                             ON MSETCL’S
PETITION......................................................................................................................... 30
7. TRANSMISSION LOSSES AND MSETCL’S ENERGY BALANCE (MU)............ 30
8. ANALYSIS OF EXPENSES....................................................................................... 31
9. EMPLOYEE EXPENSES........................................................................................... 31
10. REPAIRS & MAINTENANCE (R&M) EXPENDITURE ........................................ 33
11. ADMINISTRATION AND GENERAL EXPENSES................................................. 33
12. DEPRECIATION EXPENDITURE........................................................................... 34
13. CAPITAL EXPENDITURE ....................................................................................... 36
14. INTEREST AND FINANCE CHARGES .................................................................. 37
15. OTHER EXPENSES................................................................................................... 41
16. INCOME TAX ............................................................................................................ 41
17. SERVICE TAX LIABILITY ...................................................................................... 41
18. CONTRIBUTION TO CONTINGENCY RESERVES ............................................. 42

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19. NON-TARIFF INCOME ............................................................................................ 42
20. RETURN ON EQUITY .............................................................................................. 42
21. ANNUAL REVENUE REQUIREMENT................................................................... 44
22. IMPACT OF SLDC CHARGES AND RLDC CHARGES........................................ 45
23. TRUING UP MECHANISM ...................................................................................... 45
24. TARIFF PHILOSOPHY ............................................................................................ 45
25. REVENUE FROM REVISED TARIFFS................................................................... 46
26. OTHER DIRECTIVES............................................................................................... 46
27. APPLICABILITY OF ORDER.................................................................................. 46




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PART II: OBJECTIONS                 RECEIVED,       MSETCL’s       RESPONSE        AND      THE
COMMISSION’S RULING

1.       ACCURATE ENERGY ACCOUNTING AND LOSS ESTIMATION

1.1      Objection

Prayas raised an issue with regard to accurate energy accounting and loss estimation. They
mentioned that MSETCL does not have meters installed at every voltage level. This makes
the process of energy accounting inaccurate and MSETCL cannot measure losses at every
voltage level. Therefore, Prayas requested the Commission to direct MSETCL to install
interface meters at every voltage level. These meters should be AMR enabled and the data
should be downloaded without any manual interference. Such data from all interface meters
should be available on MSETCL’s website and should be updated regularly. Moreover,
periodic (say monthly) energy balance of MSETCL’s system should also be available on the
website.

Moreover, Prayas made a comment that the present line loading and available capacity of the
line should be made available on MSETCL’ website on daily basis. These issues are essential
as we are moving towards open access and MSETCL being the STU.

1.2      MSETCL’s Response

MSETCL has replied that it has planned a programme for interface metering at different
voltage levels in a phased manner. Phase –I covers inter-state and inter- utility lines in
Maharashtra with following works:

              i.      Providing 224 Nos. of ABT compliant meters at the interfacing points.
              ii. Hardware and software required at substation level for Automatic
                  Meter Reading of the ABT meters.
              iii. Time synchronization equipment for each substation.
              iv. Hardware and software required for data processing at central station
                  i.e. CLDC, Kalwa.
              v. Communication system through VSAT link between various
                 substations and CLDC for on-line data transfer.
              vi. Software and hardware for monitoring at five nos. of Transmission
                  O&M Zones.

         Tender for Phase –I is in process.


         In Phase –II following works are planned:

             a.       Providing ABT compliant meters at about 1300 locations. The total No. of
                      meters will be about 2500.

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             b.       Providing about 6000 nos. of 0.2 class, four quadrant type, multifunction
                      meter having communication facility for energy accounting purpose.
             c.       Station level AMR comprising of PC, Printer, data concentrator etc. for
                      about 500 substations.
             d.       Time synchronization equipments at 500 substations.
             e.       Hand-held MRI, Control cables etc. for about 500 substations.
             f.       VSAT hardware at each substation for data transfer to CLDC, Kalwa.
             g.       Master server, hardware and software at CLDC Kalwa for ABT billing and
                      energy audit with on-line monitoring facility.
             h.       Terminals for accessing data (monitoring) at corporate office and five zonal
                      offices.
             i.       Establishment of VSAT communication network for on-line data transfer of
                      metering parameters from various substations to CLDC, Kalwa, Corporate
                      office and zonal offices. The VSAT link is also envisaged for SCADA data
                      and speech.


The works covered under phase I programme i.e. ABT metering for inter-state and inter-
utility line is expected to be completed by March 2007. The works covered in the second
phase covering about 500 stations will be completed by March 2008.

However MSETCL is planning to complete above programme by Sept.2007, there after
Energy audit data shall be made available on website.

Presently 400KV system network diagram with real time updates of loading at every 10
minutes interval is displayed on website of SLDC “www.sldcmsebindia.com” and website of
MSETCL “www.mahatransco.in” along with generation exchange and demand overview for
the state.

Daily system performance report is also made available on these websites.

The related data regarding line loading shall be made available on website after completion of
the ABT metering programme as stated above.

1.3      Commission’s Ruling

The Commission has been emphasizing time and again that there should be accurate energy
accounting and loss estimation at various voltage levels. However there has been a slow
progress in this regard. The Commission notes the Phased Programme of MSETCL for
interface metering at different voltage levels towards accurate energy accounting and loss
estimation. The Commission directs MSETCL to ensure metering of all interface points and
to put in place appropriate energy accounting system within six months from the date of issue
of this Order.

The Commission also directs MSETCL to make available data on energy balance of
MSETCL’s system and present line loading and available capacity of the line on MSETCL’s
website in line with the timeframe set by the Commission (i.e. within six months from the
Objections Received and Commission’s Ruling                                            Page 13 of 13
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Case No. 49 of 2005                                         MERC ARR Order for MSETCL for FY 2006-07


date of issue of this Order). This is important from the point of view of the readiness of
MSETCL network for moving towards the Open Access in Transmission.

2.        TRANSMISSION LOSSES

2.1       Objection

Maharashtra Elektrosmelt Limited (MEL) has made the following objections with regard to
Transmission losses. MEL has specified that at Page 10 of MSETCL’s ARR and Tariff
Petition for FY 2006-07, under point 2.2, MSETCL’s energy balance, MSETCL has proposed
transmission losses of 6% for FY 2006-07, based on FY 2005-06 figures of 6%.

MEL has observed that MERC in their Order in Case 55 and 56 of 2003 at page 12 issue no.
8, have fixed level of 2% and 5% as wheeling and transmission charges respectively for
wheeling of power from the grid. Further, OERC in their Order of Case No. 43 of 2005 for
OPTCL have fixed transmission loss for wheeling as 4% at page 35 point no. 5.95 of the
Order. Therefore, MEL has stated that the ARR for MSETCL to be based on Transmission
losses of 4-5% and not 6% as proposed by MSETCL.

Thane Belapur Industries Association (TBIA) has objected that the Transmission losses as
proposed by MSETCL at 6% for FY 2006-07 are unjustifiable as internationally these
transmission loss levels are about 3.5%

2.2       MSETCL’s Response

MSETCL has replied that the request of MEL to reduce the allowable transmission losses is
not admissible for the following reasons:

      q The actual transmission losses in the MSETCL system (as determined by the
          difference in the metered energy at interchange points (input and output points) works
          out to slightly higher than 6%, which is also substantiated by the energy audit of extra
          high voltage (EHV) level feeders, which indicates losses at 6%.
      q There are no commercial losses in the transmission system, and the losses are entirely
          technical losses.
      q In order to reduce the transmission losses, significant investment will have to be
          undertaken. The Honorable Commission will appreciate that in the past, in an
          integrated Utility structure, the transmission business has not seen the quantum of
          investment that should ideally have been undertaken. Even then, the loss levels
          proposed by MSETCL are not very high, in view of the vast transmission network in
          the State, and the mix of voltages prevalent in the State, with the presence of lower
          voltages like 66 kV.
      q MSETCL is proposing a quantum jump in the capital investments and is in the process
          of tying up the funds for the same. Once the capital investments are in place, then the
          overall system reliability will improve and the transmission loss levels will also reduce.
      q The transmission losses are also a factor of the voltage levels and the length of the
          transmission network. Hence, it is inappropriate to compare MSETCL with OPTCL
          and cite the OERC Order in this context.

Objections Received and Commission’s Ruling                                            Page 14 of 14
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      q In MSETCL system, at present, the load centers are located primarily in the Western
          part of the State and the generation is located primarily in the Eastern part of the State.
          In the Western side, about 2000 MW hydel generation is established at Koyna. When
          Koyna hydro station runs at full capacity, the system losses are lower, and when
          Koyna generation is Nil, maximum power flow is coming from Chandrapur and
          Koradi TPS including the Central Share for meeting the Western demand, and the
          losses are higher due to overloading of Eastern EHV Corridor.
      q The Commission has also accepted the transmission loss levels of around 6% in the
          past, which have been indicated through the energy accounting reports submitted to
          the Commission.
      q The 'transmission charge' of 5% indicated by the Commission in the Orders for
          renewable energy sources and captive power plants is an interim dispensation and is
          not based on any detailed studies, as the Order clearly states, "...pending State-wide
          load profile studies to arrive at the actual levels of Transmission Losses and
          applicable Wheeling Charges".
      q The Commission's earlier dispensation was based on the integrated Utility structure of
          the erstwhile MSEB, wherein the cost allocated to the transmission function was not
          clearly known. However, the accounts have now been segregated and a separate
          Transmission Company has been formed. Hence, the earlier interim dispensation of
          5% transmission charges needs to be reviewed in the light of these developments.
Therefore, MSETCL requests the Honorable Commission to consider the above, and allow
transmission losses of 6% and allow the ARR Petition of MSETCL.

2.3       Commission’s Ruling

The Commission considers that after taking into account all the relevant factors, the
transmission loss of 6% as proposed by MSETCL for FY 2005-06 and FY 2006-07 is high.

To arrive at the scientifically analysed optimum loss level in the MSETCL system, the
Commission engaged CPRI to undertake a load flow analysis study with regard to the
transmission loss level in the MSETCL transmission network. On the basis of data collated
and analysis prepared by CPRI, they have arrived at a transmission loss level of 4.445% in the
MSETCL network for FY 2004-05. Considering certain limitations in the study report of
CPRI and also taking into account the norms adopted in other transmission systems such as
Andhra Pradesh, Karnataka, Gujarat and Madhya Pradesh, the Commission is of the view that
the transmission loss for the MSETCL network should be at 4.6% for both FY 2004-05 and
FY 2005-06.

Keeping in view the additional power flows from the eastern corridor and some uncertainties
in the western corridor generation (e.g. Koyna Hydro generation and Dabhol Power
Company) and considering that the demand for power is going to be high, the transmission
losses in the MSETCL network are bound to increase in FY 2006-07. Therefore, the
Commission has approved a transmission loss level of 4.85% for the MSETCL network for
FY 2006-07.

Thus, the Commission has considered transmission losses at 4.6% for FY 2004-05 and FY
2005-06 and transmission losses at 4.85% while estimating the energy transmitted by

Objections Received and Commission’s Ruling                                             Page 15 of 15
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Case No. 49 of 2005                                     MERC ARR Order for MSETCL for FY 2006-07


MSETCL for FY 2006-07. The Commission will fine tune the transmission loss levels for
MSETCL network under the Multi Year Tariff (MYT) framework beginning FY 2007-08.

3.       EXPENDITURE

3.1      Advance Against Depreciation

3.1.1    Objection

Prayas made an observation with respect to Advance Against Depreciation (AAD). MSETCL
has proposed AAD of Rs. 199 Cr in FY 2007. The MERC Tariff Regulations (section 48.3)
mandate that AAD should be restricted to 1/10th of the principal amount of loans those are to
be repaid in the financial year minus allowable depreciation for that year. However, for this,
original amount of loan should be known which is not submitted by MSETCL. Therefore the
Commission should ensure that AAD claimed by MSETCL falls within the limit.

3.1.2    MSETCL’s Response

MSETCL has replied that it is in agreement with depreciation norms prescribed by MERC in
Terms & Conditions of Tariff (Regulations) 2005. However, MSETCL would like to submit
that in the past they have charged depreciation as per notification issued by Ministry of
Power, Government of India dated. 29.3.1994. A sudden change at this juncture will create
mismatch between cash inflows and repayment liabilities pertaining to past assets. Therefore
MSETCL suggests that for new assets to be created after 1.4.06, the provision of Tariff
Regulations may be adopted.

3.1.3    Commission’s Ruling

The Commission has computed AAD for FY 2006-07 as per the MERC (Terms and
Conditions of Tariff) Regulations, 2005. The computation of AAD has been elaborated in Part
III of this Order.

3.2      Capital Expenditure

3.2.1    Objection

Prayas observed that MSETCL has proposed many capital investment projects over next 3
years for transmission system strengthening. The total capital expenditure by MSETCL in
next 3 years is about Rs. 8,500 Crore and the capital expenditure planned in FY 2007 is Rs.
1,054 Crore. Therefore, these projects need to be scrutinized in detail.

During technical validation session Prayas had raised the issue of huge differences in scheme
wise capital expenditure amounts mentioned in the rolling plan and those submitted in the
ARR. Prayas once again requested the Commission to look into the changed priorities of
MSETCL and analyse which schemes are included/ excluded from ARR/ Rolling plan. Prayas
mentioned that they could not find capital expenditure details for FY 2006 and FY 2007 in the
revised ARR document.


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Case No. 49 of 2005                                     MERC ARR Order for MSETCL for FY 2006-07


Prayas further observed that in the additional data submitted by MSETCL, it has given the
cost of the proposed projects and their transmission capacity in every construction circle.
However, there are wide fluctuations in cost of these projects (expressed as Rs. Cr/MVA
capacity addition) in different circles. For example, in FY 2007, cost of transmission projects
in Nasik circle is Rs. 88 Cr and MVA capacity addition is 1025 MVA. Hence cost of the
project becomes Rs. 0.09 Cr/MVA capacity addition. However, in the same year, this cost in
Kalwa is circle Rs.177 Cr, while MVA capacity addition is 475 MVA. This translates to 0.37
Rs. Cr/MVA capacity addition. MSETCL should explain why there are such wide fluctuations
in transmission project costs in different circles.

Considering the huge amount of Capital investments of MSETCL, as well as the critical role
of transmission network in enhancing supply to consumers in the State, Prayas requested the
Commission to prepare detailed and critical milestones for every project. MSETCL should be
directed to submit quarterly report on compliance of the milestones to be set by the
Commission. To enhance transparency and accountability, this compliance report should be
available on MSETCL’s website. This is also important for planning from the perspective of
Open Access consumers.

3.2.2    MSETCL’s Response

MSETCL has submitted that all new schemes above Rs. 10 Crores will be submitted to
MERC for approval immediately after the approval of MSETCL Board of Directors.

MSETCL has submitted a list of schemes for which Budget provision is revised in order to
complete the schemes earlier, which is provided as an annexure to its reply. MSETCL has
also stated that it has already submitted the projected capitalization FY 2006-07 in form 4.4
with scheme wise details. It has provided the abstract of the Form 4.4 along with its reply.

MSETCL has submitted the following as an explanation of the varying levels of Rs. Crore/
MVA capacity additions for investment projects in FY 2006-07 for Kalwa Transmission
Construction Circle and Nasik Transmission Construction Circle.

In the Kalwa Const. Circle:


    (1) There are eight numbers of schemes which will be newly started with a total
        provision of Rs.48.00 Crores. These schemes include 3 GIS sub-stations and other
        220 KV schemes which will not be completed during FY 2006-07, hence no MVA
        addition is FY 2006-07
    (2) Further, there are 11 nos. of R&M Schemes for which budget provision is of Rs.
        47.00 Crores and there will not be any MVA addition.
    (3) There are some augmentation schemes for which Rs. 30.00 Crores budget provision
        and MVA addition is 475 MVA.
Where as in Nasik Const. Circle, there are 5 nos. of Wind Generation Project with MVA
addition of 450 MVA during FY 2006-07 for which no budget provision is required as all the
expenditure is being incurred by the developers & budget provision of 1/10th of the cost of
the scheme will be made after one year from date of commissioning of sub-station.


Objections Received and Commission’s Ruling                                        Page 17 of 17
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Case No. 49 of 2005                                     MERC ARR Order for MSETCL for FY 2006-07


For new schemes, Rs. 36.00 Crores budget provision is made with MVA addition of 200
MVA during FY 2006-07. For augmentation of sub-station Rs. 16.00 Crores budget provision
is made with 375 MVA addition during 2006-07. There are 5 number of R&M Schemes for
which budget provision of Rs. 16.00 Crores as made and no addition in MVA.

From above it is seen that the comparison of investment against MVA addition is not proper
way of comparison.

3.2.3    Commission’s Ruling

The Commission had earlier observed that the Capital Expenditure Plan for FY 2006-07
submitted by MSETCL was high in comparison to past trends and had directed MSETCL to
submit a 3-year Rolling Plan for its Capital Expenditure duly approved by its Board and the
same will be scrutinized for projects proposed to be undertaken by MSETCL.

The Commission has directed MSETCL to look into the system study report based on which
MSETCL’s 3-year rolling plan should be prepared. The existing system loading condition,
voltage and constraints are to be clearly shown on the network plan to (technically) justify
addition or strengthening of existing system, sub-stations and lines along with impact of such
addition / strengthening of the existing network. The Commission has asked MSETCL to set
out the lacuna/ drawbacks in the present transmission system which the plan proposes to
address.

The Commission has also asked MSETCL to list the order of priority in which the fresh
schemes are proposed to be undertaken in FY 2006-07. Against each scheme, (both
continuing schemes as well as new proposed) the objective of the scheme and how the same
fits into the overall objective of strengthening network in an optimum manner and its likely
benefits in quantified terms and possible impact on tariff will have to be stated by MSETCL.

 The Commission will give appropriate directions regarding milestones for completion of
schemes and quarterly reports for monitoring of the progress of the schemes by the
Commission.

The Commission has noted the explanation provided by MSETCL for the varying levels of
the expenditure in Rs. Crore/ MVA parameter in cases of investment in Kalwa and Nasik
Circles. These MVA additions should not be seen as for a stand alone year 2006-07 but
should be seen as per the 3 year rolling plan and more so over the completion period of the
schemes. The Commission will take into account this aspect in the scrutiny of the 3 year
Rolling Plan.

3.3      Employee Expenditure

3.3.1    Objection

Kolhapur Engineering Association (KEA) has submitted that it is required that expenditure is
reduced through increase in productivity per person. However, MSETCL’s employee
expenses are going on increasing as it has shown in the ARR Petition as for year 2004-05 it is
Rs.245.83 Crore, for year 2005-06 it is Rs. 264.28 Crore and for year 2006-07(P) it is Rs.
Objections Received and Commission’s Ruling                                        Page 18 of 18
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Case No. 49 of 2005                                     MERC ARR Order for MSETCL for FY 2006-07


297.13 Crore. However, neither the generation nor the quantum of energy transmission has
increased in that proportion. Also, the expenses of MSETCL are increasing for transmission
of electricity. No control has been exercised over these expenses. Hence, the Employee
Expenses as proposed by MSETCL in its Petition should not be approved. The Productivity
measures should be designated in comparison to that of TPC, Reliance Energy and NTPC.

Thane Belapur Industries Association (TBIA) has stated during the Public Hearing (held on
13th June 2006) that the Employee Expenditure of MSETCL is projected to increase from Rs.
245.8 Crore in 2004-05 to Rs. 297.13 Crores in 2006-07 as given in its ARR Petition.
MSETCL has provided for a Pay Revision of Rs. 33 Crore for FY 2004-05. A detailed
examination of that is required.

3.3.2    MSETCL’s Response

As replied in other responses, MSETCL considers the transmission losses of 6% to be very
reasonable. In order to reduce the transmission losses appropriate investment is required. The
Operation and Maintenance Expenses of MSETCL comprise of employee expenses,
administration and general expenses, and repairs and maintenance expenses. The reasons for
increase in these expenses are provided in the MSETCL Petition for approval of the Annual
Revenue Requirement for FY 2006-07.

MSETCL has stated that the increase in employee expense are mainly on account of wage
revision and only 4% increase has been considered on salary expenses which is less the
Consumer Price Index (CPI). The increase in Administration and Employee expenses is also
lesser than the CPI. The earlier level of repairs and maintenance expenses was very less (i.e.
0.9% of the Opening GFA. Hence MSETCL has revised it upward to 1.5 % of the opening
GFA.

With reference to the employee expenses, MSETCL has provided the following explanation:


         a)     The employee cost in FY 2004-05 is Rs. 245.83 Cr (i.e. employee cost Rs.
                212.83 Cr. plus Wage revision impact of Rs. 33 Cr.) and not Rs. 212.83 Cr., as
                stated by TBIA.
         b)     The employee cost projected for FY 2005-06 is Rs.264.28 Cr, which is an
                increase of Rs.18.45 Cr. (i.e. 7.5%) over FY 2004-05 levels, on account of
                normal increase in increment, Dearness Allowance, PF & Gratuity, etc.
         c)     The employee cost projected for FY 2006-07 is Rs. 283.63 Cr, which is an
                increase of Rs.19.35 Cr (i.e. 7.3%) over FY 2005-06 levels, on account of
                normal increase in increment, Dearness Allowance, PF & Gratuity, etc. In
                addition to this, additional employee cost for staff to be deployed in the new
                substations amounting to Rs. 13.51 Cr. has been projected in FY 2006-07. Thus
                the total projected employee cost for FY 2006-07 is Rs. 297.13 Cr.

Thus, the employee expenses considered by MSETCL are reasonable, and the Commission
may please approve the same.




Objections Received and Commission’s Ruling                                        Page 19 of 19
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Case No. 49 of 2005                                       MERC ARR Order for MSETCL for FY 2006-07


3.3.3    Commission’s Ruling

For the year FY 2005-06, the Commission has taken the CAGR for the past 5 years (2000-01
to 2004-05) which comes to 6.2% and the capitalisation of Employee Expenses based on
average capitalisation for last three years for MSEB as a whole for arriving at the Employee
Expenses for that year. Similarly, for FY 2006-07, the Commission has taken CAGR for the
past 5 years (2001-02 to 2005-06) at 7.1% and the capitalisation of Employee Expenses based
on average capitalisation for last three years for MSEB as a whole for arriving at the
Employee Expenses for that year. The details of computation of employee expenses are given
in Part III of the Commission’s Order.

3.4      Administration and General (A&G) Expenses

3.4.1    Objection

Thane Belapur Industries Association (TBIA) has stated during the Public Hearing (held on
13th June 2006) that the total A&G Expenses of MSETCL are increasing from Rs. 39.65
Crores in 2004-05 to 40.99 Cores in 2005-06 and to Rs. 43.03 Crores in 2006-07. The
‘Others’ component is shown as Rs. 21.1 Crores in 2004-05 and 22.27 Crores in 2005-06 and
23.38 Crores in 2006-07 appears high as a share of the total and a detailed break-up of the
‘Others’ component is needed to be examined.

3.4.2    MSETCL’s Response

In its reply MSETCL has referred to the detailed break-up of A&G Expenses as provided by it
in the Form 2.2 of the revised ARR and Tariff Petition (dated 23rd May 2006) submitted by it.
MSETCL has submitted a further break-up of the ‘Others’ component as shown in this form
against the amount of Rs. 10.37 Crores for 2004-05. The details of ‘Other Expenses’ of Rs.
10.37 Crore shown under Form 2.2: Administration and General Expenses as provided by
MSETCL are as under:-


Break-up of the ‘Others Expenses’ component of the A&G Expenses in Form 2.2 of the
ARR Petition for FY 04-05.
 Sl.   Particulars                                             Amounts (Rs. Cr.)
 No.
  1    Vehicle Petrol & Oil for Trucks/Delivery Van                  2.99
  2    Vehicle Licence & Registration Fee                            0.14
  2    HVDC Project – Lease Rentals, Insurance Charges &             2.32
       Taxes etc.
  3    Govt. Inspection fees for Board’s Installations               1.83
  4    H.O. Admn. & General Expenses                                 2.53
  5    Other Expenses (like Meetings/ Conference Exp., Transit       0.53
       Insurance, Octroi, Incidental Stores Expenses., Other
       Material Related Expenses, etc.)
       Total                                                        10.37
Source: MSETCL Reply to objections raised during the Public Hearing held on 13/06/06




Objections Received and Commission’s Ruling                                            Page 20 of 20
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Case No. 49 of 2005                                   MERC ARR Order for MSETCL for FY 2006-07


3.4.3    Commission’s Ruling

The Commission has noted the point raised on the examination of ‘Others’ component of the
A&G expenses and break-up of the same provided by MSETCL. The Commission has
computed the A&G expenses as per the principles enunciated in the earlier tariff order for
MSEB as a whole. The details of the computation of A&G Expenses are provided in Part III
of the Order.

4.       TARIFF RELATED ISSUES

4.1      Cash flow of MSETCL

4.1.1    Objection

Prayas observed that for ensuring that the cash flow situation of MSETCL remains smooth,
regular revenue from MSEDCL should be continued. Therefore, Prayas requested the
Commission to direct MSETCL to report to the Commission every occurrence of non-
payment of its transmission charges by MSEDCL for more than two consecutive months and
MSEDCL should also be directed accordingly.

4.1.2    MSETCL’s Response

MSETCL has stated that this is an inter-company issue and has nothing to do with the tariff
fixation exercise. Therefore in MSETCL’s view, the question of giving directions does not
arise.

4.1.3    Commission’s Ruling

It is for MSETCL and MSEDCL to enter into commercially binding agreements (Bulk Power
Transmission Agreement (Intra-State) – BPTA-IS) for protecting their own interests in a
comprehensive manner. Any breach of such contracts/ agreements can be dealt with by
appropriate forums.

5.       OTHER OBJECTIONS/ ISSUES

5.1      Re-computation of the ARR on the basis of MERC norms

5.1.1    Objection

MEL has specified that MERC in their terms and conditions of Tariff Regulations, 2005, have
specified norms under part F. MEL, thus states that the ARR proposed by MSETCL to be re-
worked on the basis of these norms and transmission charges of 4-5%.

MEL has also specified that under Energy Conservation Act, 2001, MSETCL needs to take
energy conservation measures to improve energy efficiency by reducing transmission losses.




Objections Received and Commission’s Ruling                                      Page 21 of 21
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Case No. 49 of 2005                                     MERC ARR Order for MSETCL for FY 2006-07


5.1.2     MSETCL’s Response

MSETCL has said that the MERC (Terms and Conditions of Tariff) Regulations, 2005
stipulate the following norms of availability, for recovery of annual transmission charges:

"Target availability for full recovery of annual transmission charges

(a) AC system :- 98 per cent

(b) HVDC bi-pole links and HVDC back-to-back stations:- 95 per cent

Note 1

Recovery of annual transmission charges below the level of target availability shall be on
pro-rata basis. At zero availability, no transmission charges shall be payable.

Note 2:

The target availability shall be calculated in accordance with procedure provided in the
Annexure-II to these Regulations."

In FY 2004-05, the availability of MSETCL's HVAC network was 98.55%, while the
availability of the HVDC network was 94.64%. In FY 2005-06, the availability of MSETCL's
HVAC network was around 98.72%, while the availability of the HVDC network was around
63.48%.

Thus, the availability of the HVAC network, which comprises the bulk of the transmission
network in the State, is well above the normative availability levels stipulated in the Tariff
Regulations.

As the Honorable Commission is aware, that the availability of the HVDC network has
dipped in FY 2005-06 as the HVDC link was operating in monopole mode for most part of
the year, due to the failure of BHEL transformers, as against the bi-pole mode that it is
designed for. This amounts to a force-majeure event, and the MSETCL has done its best to
ensure that the HVDC link is back to full availability, and has achieved the same.

Further, the length of the HVDC link is only 1,504 ckt km, as compared to 33,604 ckt km of
HVAC network. Thus, HVDC transmission lines comprise only around 4.5% of the
transmission lines in the State.

Accordingly, MSETCL submits that the ARR of MSETCL should be accepted, as it has met
the norms stipulated in the Tariff Regulations.

5.1.3     Commission’s Ruling

During the year FY 2005-06, the availability of the MSETCL HVAC network (which
constitutes close to 95.5% of the ckt. km of the overall transmission network of MSETCL)
was 98.55 % and the availability of the HVDC network had dipped to 63.48% due to force
majeure event. MSETCL has made separate representations to the Commission on the low
Objections Received and Commission’s Ruling                                        Page 22 of 22
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level of availability vide its letter PP/HVDC/601(A)/1095 dtd. 7th February 2006. MSETCL
has represented in its reply to this objection raised by MEL that it has done its best to ensure
that the HVDC link is back to full availability and has achieved the same currently.

The Commission directs MSETCL to confirm the availability of the HVDC link for the time
period April 2006 to June 2006 (first quarter of FY 2006-07) and submit its reply in this
regard by 31st July 2006.

For the purpose of approving the ARR for MSETCL for FY 2006-07, the Commission has
considered the availability of MSETCL network in compliance of the levels eligible for
recovery of the full annual transmission charges. However, this is subjected to truing up
mechanism in the ARR for MSETCL in the next year viz. FY 2007-08 based on actual level
of availability achieved by the HVAC and HVDC transmission network of MSETCL during
FY 2006-07 against the target availability norms given under Section 49.1 of the MERC
(Terms and Conditions of Tariff) Regulations 2005. Thus, MSETCL should submit the details
of actual level of availability achieved by MSETCL transmission system in FY 2006-07 at the
time of submission of the ARR Petition for FY 2007-08.

Any incentive for achieving annual availability beyond the target availability shall be as
stipulated under the MERC (Terms and Conditions of Tariff) Regulations, 2005.

5.2      Contractual protections

5.2.1    Objection

Prayas observed that during the public hearing on Load Shedding protocol, MSETCL had
submitted that for long periods HVDC link operates on one pole leading to associated
reduction in transmission capacity, overloading and increased losses. Frequent failure of
transformers and long period for repair was sited as the major reason for this. In this context,
MERC had directed MSETCL to take appropriate actions on the suppliers of the equipment as
per contractual rights of MSETCL. Prayas urged MERC to ascertain if MSETCL has taken
appropriate action.

Prayas has stated that in the context of current capital expenditure programs, it is critical to
ensure that MSETCL has adequate contractual protection in case of supplier default or failure
to meet agreed performance. Hence, Prayas requested MERC to direct MSETCL to ensure
that appropriate provisions are included in all contracts with suppliers.

5.2.2    MSETCL’s Response

MSETCL vide letter PP/HVDC/601(A)/1095 dtd. 7th February 2006 have submitted the
detail to the commission regarding MSETCL’s action in this context. In summary, MSETCL
has stated that it has made a rigorous follow-up from time to time with correspondences,
meetings at various levels, etc. with M/s. ABB/ BHEL requesting them to find the root cause
of failure of the Converter Transformer in the HVDC Link. Investigations to find out the root
cause of failure of converter transformer are being carried out by M/s. ABB/ BHEL for more
than last 3 years. ABB has identified the problem of Cu2S contamination in the Transformer
Oil and suggested addition of passivator in transformer oil.
Objections Received and Commission’s Ruling                                         Page 23 of 23
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Case No. 49 of 2005                                     MERC ARR Order for MSETCL for FY 2006-07


M/s.ABB/BHEL agreed to work out turn around time for repair of converter transformer in
such away that Bipolar operation will not be hampered. MSETCL however, kept the
reservation with M/s.ABB/BHEL for supply 1 number additional spare converter transformer
at each site.

MSETCL has stated that after receipt of confirmation from M/s.ABB/BHEL that they have
rectified all design deficiencies and equipment defects, the availability and reliability for
further period of 2 years excluding previous 4 years shall be monitored and if the
availability of HVDC link during this 2 yrs period falls below the guaranteed value, then the
liquidated damages as stipulated in the contract specification would be made applicable to the
contractors.

5.2.3    Commission’s Ruling

The Commission opines that generally all agreements/ contracts for supplying equipments
provide for contractual protection in case of supplier default or failure to meet agreed
performance, it is the enforcement of these provisions which is lacking.

The Commission therefore directs MSETCL to provide a status report on action taken by
MSETCL in this regard and its progress in getting the appropriate compensation for this.

Above all, MSETCL must ensure the availability of the Transmission system (HVAC and
HVDC) at least at the levels specified by the Commission under Section 49.1 of the MERC
(Terms and Conditions of Tariff) Regulations 2005.

5.3      Transmission Capacity Utilisation of MSETCL Network

5.3.1    Objection

Kolhapur Engineering Association has submitted that the Generation of MSPGCL is 9,000
MW and there is a shortage of 4,000 MW of power. This means that even though the
MSETCL transmission capacity is 13,000 MW, it is not able to utilize its capacity completely.
No planning by MSETCL is seen in increasing its transmission network capacity utilization.

If the transmission capacity of MSETCL is considered then not more than 70% of capacity is
being utilized by MSETCL. This is because there is reduction of 30% in the generation of
electricity. Therefore the network of MSETCL is not utilized to its full capacity. Therefore
there is no question of consideration of the Petition of MSETCL for Annual Revenue
Requirement for FY 2006-07. The Petition of MSETCL for Annual Revenue Requirement for
FY 2006-07 should not be approved.

5.3.2    MSETCL’s Response

In the present circumstances the MSETCL transmission system is capable of meeting the
requirement of handling the demand for Maharashtra (13000 MW) from State Generation
(from MSPGCL) and the share of the energy generation from the Central sector as well as
other purchases. Even then, it is necessary to increase the capability and capacity of the
transmission network in order to maintain effective co-ordination and management of the
Objections Received and Commission’s Ruling                                        Page 24 of 24
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Case No. 49 of 2005                                    MERC ARR Order for MSETCL for FY 2006-07


transmission sub-stations, transmission lines and associated equipment. The overall revenue
requirement includes the Administration and General Expenses.

Planning for the transmission system needs to ensure that apart from the generation capacity
aspect the transmission system is able to handle the demand of all the users with more
reliability and with sufficient additional capacity than requirement. Hence it will not be
appropriate to compare the generation of energy with that of the transmission capacity.

5.3.3    Commission’s Ruling

The transmission capacity of MSETCL is utilized as per the requirement of end-user
MSEDCL and not as per the Generation of MSPGCL alone. MSEDCL purchases part of its
overall requirement of 78,456 MU (FY 2006-07) from MSPGCL as well as from Central
Sector and other available sources. Hence, there is a difference in the quantum of generation
of electricity by MSPGCL and the energy handled by MSETCL. As per reply from MSETCL,
currently, MSETCL has not contracted any capacity with MSEDCL, as there is no specific
Transmission Agreement entered into with MSEDCL.

However, MSETCL has submitted data on the Peak, Average and Minimum Demand for the
past three years as shown in the following table.


  Table: Yearly Peak, Minimum and Average Demand in MW handled by MSETCL




Source: MSETCL Additional Data submission vide its letter dated 01/06/06, re: MSETCL//CP-
TRC/ARR/5610


This shows that the demand handled for MSEDCL by MSETCL network in FY 2005-06
varies between 7,000 MW to 14,061 MW.

The Commission has already specified the Norms for Operation under Clause 49.1 of the
MERC (Terms and Conditions of Tariff) Regulations 2005, specifying the target availability
of the Transmission System for full recovery of the Transmission Charges. The Commission
has accordingly approved the Annual Revenue Requirement of MSETCL for the year FY
2006-07.

However, the Commission directs MSETCL to ensure optimum utilization of its network
capacity through proper planning and implementation of its 3 year rolling plan for investment
in co-ordination with that of MSPGCL and MSEDCL. The Commission also directs
MSETCL to enter into transmission agreement with MSEDCL latest by 31st August 2006.




Objections Received and Commission’s Ruling                                       Page 25 of 25
MERC, Mumbai
Case No. 49 of 2005                                         MERC ARR Order for MSETCL for FY 2006-07


5.4        Transparency

5.4.1      Objection

In the interest of transparency, Prayas urged the Commission to provide detailed calculations
and analysis carried out during this tariff revision process in the tariff order and to make soft
copies of the same (spreadsheet version) available on its website (including formulae).

5.4.2      MSETCL’s Response

MSETCL has not provided any specific reply on this aspect.

5.4.3      Commission’s Ruling

The Commission has provided detailed calculations and analysis in this Order.

5.5        Lower Capacity Additions/ Capital Expenditure in high load density areas like
           Kalwa and Aurangabad Circles

5.5.1      Objection

Thane Belapur Industries Association has objected that the capacity additions indicated by
MSETCL as shown in the three year rolling plan are very low for important high load density
areas like Kalwa and Aurangabad Circles, especially when in an important lifeline area like
Kalwa tremendous occurrences of tripping are taking place.

5.5.2      MSETCL’s Response

Kalwa Construction Circle consists of two districts only viz. Thane and Raigad.                 The
remaining construction circles and districts therein are as under:

      1)      Pune Construction Circle :-
              Pune, Satara, Sangli, Kolhapur and Solapur.
      2)      Nagpur Construction Circle:-
              Nagpur, Amravati, Akola, Washim, Bhandara, Chandrapur, Wardha and
              Gadchiroli.
      3)      Nasik Construction Circle:-
              Nasik, Dhule, Jalgaon and Ahmednagar.
      4)      Aurangabad Construction Circle:-
              Aurangabad, Nanded, Jalna, Parbhani, Beed and Latur.


The investment planned is according to need base. The discrimination on any region basis is
not the criteria. The evacuation of energy projects which are listed separately in Rolling Plan,
containing major investments for the works in Kalwa and Aurangabad Circle.




Objections Received and Commission’s Ruling                                            Page 26 of 26
MERC, Mumbai
Case No. 49 of 2005                                     MERC ARR Order for MSETCL for FY 2006-07


5.5.3    Commission’s Ruling

 The 3-year Infrastructure Rolling Plan submitted by MSETCL is being separately scrutinized
for projects proposed to be undertaken by MSETCL.

5.6      Data on energy units handled by transmission network for MSEDCL apart from
         that generated by MSPGCL

5.6.1    Objection

Kolhapur Engineering Association has objected that no data has been provided on energy
units entering the transmission network part from that generated by MSPGCL for distribution
by MSEDCL. It has also stated that there is a difference in the units generated by MSPGCL
and that handled by MSETCL.

5.6.2    MSETCL’s Response

MSETCL has not provided any specific reply on this aspect.

5.6.3    Commission’s Ruling

MSEDCL purchases part of its overall requirement of energy from MSPGCL as well as from
Central Sector and other available sources. Hence there is a difference in the quantum of
generation of electricity by MSPGCL and the energy handled by MSETCL. The details of
energy purchased from MSPGCL and that from other sources is provided by MSEDCL in its
ARR and Tariff petition for the year FY 2006-07. MSETCL is handling the total units of
energy requirement of MSEDCL irrespective of the source of the energy.

6.       REPLIES BY MSETCL TO SPECIFIC DIRECTIVES BY THE COMMISSION
         DURING THE PUBLIC HEARING

6.1.1    Commission’s directive on development of a Network Plan for Maharashtra
         State

6.1.2    MSETCL’s Response

MSETCL in its capacity as the State Transmission Utility (STU) is in the process of
developing a separate STU structure, systems and set-up to discharge the planning related
activities for the State including Mumbai area. This structure includes an advanced ‘System
Studies’ cell to carry out network studies and planning. The formats and procedures for
submission of planning data (standard and detailed) are already developed. The new STU-set
up to co-ordinate planning activities at State level involving other Transmission Licensees and
Grid users, shall be operative by 31st July 2006. The `System Studies’ group (along with
software tool for this purpose) shall be trained and placed to work by November 2006.

In the meantime, MSETCL proposes that the network plan for the State shall be developed
using the existing system with it (SIMPOW software).



Objections Received and Commission’s Ruling                                        Page 27 of 27
MERC, Mumbai
 Case No. 49 of 2005                                       MERC ARR Order for MSETCL for FY 2006-07


 The Activity Chart for STU-set up functioning is given below:

Activity                                 Jun-06   Jul-06   Aug- 06    Sep-06    Oct-06     Nov-06
Defining organization structure
Placement of Staff
Procurement of infrastructure-System
Studies and Planning tools
Training for system studies and
database generation
Completion
 6.1.3    Commission’s Ruling

 As per Sub-section 4 of Section 3 of the Electricity Act 2003, the Authority ( as identified by
 the Central Government) shall prepare a National Electricity Plan in accordance with the
 National Electricity Policy and notify such plan once in five years.

 The Commission directs that MSETCL as a STU shall prepare a State Power System Plan for
 the whole state including Mumbai for the period ending the 11th Five Year Plan (2007-08 to
 2011-12), taking into account anticipated different load/ generation scenarios, and this should
 be in harmony with the National Electricity Plan. The Commission directs MSETCL to
 submit this State Power System Plan by 15th November 2006.

 6.2.1    Commission’s directive on System Studies for 3 Year Rolling Plan
 6.2.2    MSETCL’s Response

 The Commission directed MSETCL to remove the inadequacies in the system study report
 based on which MSETCL’s 3-year rolling plan is prepared. The existing system loading
 condition, voltage and constraints are to be clearly shown on the network plan to (technically)
 justify addition or strengthening of existing system, sub-stations and lines along with impact
 of such addition / strengthening of the existing network.

 In this regard, the scheme-wise details mentioned above for all the schemes proposed in FY
 2006-07 will be prepared and submitted for perusal of Hon’ble Commission by 15th of July
 2006.

 6.3.1    Commission’s directive on review of the Protection system Performance and
          preparations for future
 6.3.2    MSETCL’s Response

 To enhance the sub-station monitoring and protection performance, MSETCL has decided to
 implement ‘sub-station monitoring system’ at all 400 kV sub-stations and sub-stations
 attached to power stations (including Padghe, Chandrapur and Kalwa – 26 Nos.) The
 proposed sub-station monitoring system envisages provision of advance protection system
 with numerical relays having built-in disturbance recorder and event sequence recorder (DR
 and ESR) and time synchronization with GPS. Letter of Award to execute this work has been
 issued on 03/02/2006 and the completion period is 18 months. This scheme is expected to be
 completed by September 2007.

 Objections Received and Commission’s Ruling                                          Page 28 of 28
 MERC, Mumbai
Case No. 49 of 2005                                     MERC ARR Order for MSETCL for FY 2006-07


There were grid disturbances on 21st/26th September 2005 in Maharashtra system. Two
enquiry committees have submitted their detailed reports on these disturbances. To comply
with the recommendations of Enquiry Committee report, MSETCL appointed an expert
committee for the technical audit of Padghe and Kalwa S/S and enhancement of protection
performance. The recommendations of the Committee and expert group are being
implemented.

The old equipments including circuit breakers in MSETCL sub-stations which have been in
service for more than 25 years are being replaced under R&M works in phased manner. This
replacement shall be completed by March 2009.

Further, for protection purpose, 220 kV auto re-closing is being provided to all 220 kV
feeders using PLCC. Thirty nos. of 220 kV lines are being covered in the first phase that will
be completed by October 2006 and rest are planned to cover in the second phase to be
completed by April 2007. In the third phase, 132 KV auto re-closing using PLCC shall be
provided by the end of July 2007, including PLCC equipment procurement and
commissioning.

6.4.1     Commission’s directive on           development   of   SLDC      Capabilities    and
         Independence in Operation
6.4.2    MSETCL’s Response

MSETCL has already initiated steps to develop the infrastructural needs of SLDC by taking
into account its role in the State’s grid operation and control. The operating procedure,
restoration procedure and other documentation in compliance with the State Grid Code is in
process of completion. Data capability enhancement of SLDC is also proposed by way of
additional RTUs and SCADA. Special technological needs for State Energy Accounting and
unscheduled interchange settlement system is planned along with the interface-metering
programme. Further, training and manpower needs of SLDC staff are being designed by a
specially constituted committee separately. The scope of this committee is to carry out
detailed study and plan for organization, training and HR needs for SLDC enhancement. The
final report of the committee is expected in July 2006. This activity is aimed to build up
SLDC capabilities to ensure non-discriminatory and independent operation.




Objections Received and Commission’s Ruling                                        Page 29 of 29
MERC, Mumbai
Case No. 49 of 2005                                       MERC ARR Order for MSETCL for FY 2006-07




PART III: COMMISSION’S ANALYSIS AND DECISION ON MSETCL’S PETITION

7.       TRANSMISSION LOSSES AND MSETCL’S ENERGY BALANCE (MU)

In its ARR Petition, MSETCL has indicated that transmission losses for FY 2004-05 in the
MSETCL system are “in the range of” 6.01% on the basis of energy audit data. For FY 2005-
06 and FY 2006-07 also, MSETCL has considered transmission losses of 6% on the quantum
of energy requirement of MSEDCL, for projecting the energy transmitted by MSETCL.

To arrive at the scientifically analysed optimum loss level in the MSETCL system, the
Commission engaged Central Power Research Institute (CPRI) to undertake a load flow
analysis study with regard to the transmission loss level in the MSETCL transmission
network. On the basis of data collated and analysis prepared by CPRI, they have arrived at a
transmission loss level of 4.445% in the MSETCL network for FY 2004-05. Considering
certain limitations in the study report of CPRI and also taking into account the norms adopted
in other transmission systems such as Andhra Pradesh, Karnataka, Gujarat and Madhya
Pradesh, the Commission is of the view that the transmission loss for the MSETCL network
should be at 4.6% for both FY 2004-05 and FY 2005-06.

Keeping in view the additional power flows from the eastern corridor and some uncertainties
in the western corridor generation (e.g. Koyna Hydro generation and Dabhol Power
Company) and considering that the demand for power is going to be high, the transmission
losses in the MSETCL network are bound to increase in FY 2006-07. Therefore the
Commission has approved a transmission loss level of 4.85% for the MSETCL network for
FY 2006-07.

Thus, the Commission has considered transmission losses at 4.6% for FY 2004-05 and FY
2005-06 and transmission losses at 4.85% while estimating the energy transmitted by
MSETCL for FY 2006-07. The Commission will fine-tune the transmission loss levels for
MSETCL network under the Multi Year Tariff (MYT) framework beginning FY 2007-08.

The energy transmitted by MSETCL for FY 2005-06 and FY 2006-07 is shown in the Table
below:

                              Table: MSETCL’s Energy Requirement
                                                            FY 2005-06        FY 2006-07
                Particulars               FY 2004-05     ARR      MERC      ARR     MERC
                                                        Petition Approval Petition Approval
                                    #
DISCOM's energy requirement (MU)                 63,136   65,547     65,547  73,749    73,749
MSETCL's transmission losses (%)                 6.01%     6.00%      4.60%   6.00%     4.85%
Net energy transmitted by MSETCL (MU)            67,173   69,731     68,708  78,456    77,508

# DISCOM’s energy requirement figures have been taken from the MSETCL ARR Petition. These figures
may undergo a change once the MERC Order for DISCOM is finalized. Thus, the figures for energy
transmitted by MSETCL may also undergo a change to that extent.
Commission’s Analysis & Decisions                                                   Page 30 of 30
MERC, Mumbai
Case No. 49 of 2005                                    MERC ARR Order for MSETCL for FY 2006-07


As per Regulation 54.1 of the MERC (Terms and Conditions of Tariff) Regulations 2005, the
energy losses in the transmission system of MSETCL, as determined by the State Load
Despatch Centre and approved by the Commission for FY 2005-06 and FY 2006-07, shall be
borne by the Transmission System User viz. MSEDCL. The Commission will stipulate a
trajectory for transmission losses in accordance with Regulation 16 as part of the multi-year
tariff framework applicable to MSETCL from the beginning of the Control Period starting FY
2007-08.

8.       ANALYSIS OF EXPENSES

While approving the expenditure projections for FY 2005-06, the norms for approval of ARR
and principles for determination of tariff as enunciated in the latest Tariff Orders of the
licensee have been taken as the basis. Thus, the principles enunciated in the Commission’s
Order dated 10.03.2004 (Case No. 2 of 2003) for MSEB as a whole have been applied while
approving the expenses of MSETCL for FY 2005-06.

However, for the determination of ARR for FY 2006-07, the MERC (Terms and Conditions
of Tariff) Regulations 2005, have been followed.

MSETCL has given details of expenses under various heads viz. employee expenses,
administration and general expenses, repairs and maintenance expenses, depreciation, interest
on loans, etc. as per the data formats prescribed by the Commission. The Commission has
discussed the allowed expenditure on each of the expense heads and the total expenditure of
MSETCL approved by the Commission for FY 2005-06 and FY 2006-07, in the subsequent
Sections.

The Commission has considered the principles for Capitalization of expenses as enunciated in
the Tariff Order of MSEB (dated 10.03.2004). The employee expenses, administration and
general expenses and repairs and maintenance expenses have been capitalized at the average
capitalization rate observed in the past three years (for MSEB as a whole). Interest on loans
has been capitalized at the rate projected by MSETCL.

The Commission observes that MSETCL has submitted its ARR petition in accordance with
the provisional transfer scheme. The Transfer scheme is ‘provisional’ and has not yet been
finalized (as on the date of this Order) (As per MSETCL’s letter dated 19.06.2006).

9.       EMPLOYEE EXPENSES

MSETCL has submitted data on employee expenditure for FY 2004-05, FY 2005-06 and FY
2006-07 under the following heads:

§    Basic salary

§    Dearness allowance

§    Overtime

§    Other allowances
Commission’s Analysis and Decisions                                               Page 31 of 31
MERC, Mumbai
 Case No. 49 of 2005                                        MERC ARR Order for MSETCL for FY 2006-07

 §   Earned leave encashment

 §   Staff welfare and others

 §   Terminal benefits (provident fund contribution, gratuity payment and leave encashment
     on retirement).

 MSETCL has projected the employee expenditure (net of capitalisation) to increase from Rs.
 245.8 Crore in FY 2004-05, to Rs. 264.3 Crore in FY 2005-06 and Rs. 297.13 Crore in FY
 2006-07. MSETCL has assumed a capitalisation rate of 20% for employee expenses in FY
 2005-06 and FY 2006-07, based on past trends.

 For estimating the employee expenditure for FY 2005-06, the Commission has analysed the
 trend in employee expenses for Transmission function/ MSETCL for past years. Based on the
 analysis of past data, employee expenses for Transmission function/ MSETCL have increased
 at a CAGR of 6.2% for past 5 years (from FY 2001 to FY 2005). Thus, for estimating
 employee expenditure for FY 2006, the Commission has considered an increase in employee
 expenditure of 6.2% (CAGR) over the previous year FY 2005. Similarly, for estimating
 employee expenditure for FY 2007, an increase of 7.1% (CAGR from FY 2002 to FY 2006)
 has been considered over FY 2006.

 This increase in employee expenses has been allowed by the Commission for increase in DA,
 annual increments, etc., and not for additional employees.

 The employee expenses have been capitalized at the average capitalization rate observed in
 the past three years (for employee expenses and administration and general expenses for
 MSEB as a whole).

 The employee expenditure estimated for FY 2006-07, on the basis of past trends in employee
 expenses, is for MSETCL as a whole including the State Load Despatch Centre (SLDC)
 function. The SLDC budget has been approved by the Commission separately vide Order
 dated 16.05.2006 in case No. 30 of 2005, thus, the employee expenditure for MSETCL in FY
 2006-07, has been adjusted net of the employee expenses of SLDC function.

 The employee expenditure as given by MSETCL and as approved by the Commission for FY
 2005-06 and FY 2006-07, is presented in the following Table:

                                Table: Employee Expenses (Rs. Cr)
                                                 FY 2005-06         FY 2006-07
                       Particulars            ARR      MERC       ARR     MERC
                                             Petition Approval Petition Approval
            Gross employee expenditure          330.35    314.84   371.41    337.35
            Capitalisation rate                    20%    8.00%      20%     8.03%
            Less: expenses capitalised           66.07     25.18    74.28     27.10
            Net employee expenses               264.28    289.66   297.13    310.25
            Less: SLDC employee expenses             -        -        -       6.29
                                                                #
            Employee Expenses                   264.28   289.66    297.13    303.96
# For FY 2005-06, the employee expenses are inclusive of the SLDC function

 Commission’s Analysis and Decisions                                                   Page 32 of 32
 MERC, Mumbai
Case No. 49 of 2005                                    MERC ARR Order for MSETCL for FY 2006-07


10.      REPAIRS & MAINTENANCE (R&M) EXPENDITURE

In its ARR Petition, MSETCL has specified that the Commission has been approving R&M
expenses equivalent to 3% of opening Gross Fixed Assets (GFA) for the erstwhile MSEB,
which was undertaking the activities of generation, transmission, distribution and supply of
electricity in the State of Maharashtra. However, MSETCL is of the view that the R&M
expenses for MSETCL are very low, at around 0.9% of opening GFA for FY 2004-05 and
needs to be increased significantly, to atleast 1.5% of opening GFA, in order to enable
MSETCL to maintain its system network in proper working condition. Hence, MSETCL has
projected an increase in the R&M expenses, such that the net R&M expenses are 1.26% and
1.5% of opening GFA in FY 2005-06 and FY 2006-07, respectively. However, MSETCL has
not given any basis/ reasoning for taking net R&M expenses as 1.26% and 1.5% of opening
GFA in FY 2005-06 and FY 2006-07, respectively.

The Commission is of the view that the R&M expenses should be computed on the basis of
the average R&M expenses of the Transmission function/ MSETCL as a percent of opening
GFA for past 3 years. The R&M expenses have been capitalized at the average capitalization
rate observed in the past three years (for MSEB as a whole). The opening GFA considered for
FY 2005-06 and FY 2006-07 is for MSETCL as a State Transmission Utility and does not
include GFA of the SLDC function.

The R&M expenses projected by MSETCL and approved by the Commission for FY 2005-06
and FY 2006-07 are presented in the following Table.

                      Table: Repairs & Maintenance Expenses (Rs. Cr)
                                             FY 2005-06         FY 2006-07
                      Particulars         ARR       MERC      ARR      MERC
                                         Petition Approval Petition Approval
           Opening GFA                    8,322.37 8,322.37 8,452.79 8,452.79
           R&M expenses as a % of GFA       1.27%     0.73%    1.51%     0.71%
           R&M expenses                     105.66      60.89  127.88      59.69
           Capitalisation rate              0.75%     0.14%    0.75%     0.15%
           Expenses Capitalised                0.79      0.09    0.96       0.09
           Net R&M Expenses                 104.87      60.81  126.92      59.60


11.      ADMINISTRATION AND GENERAL EXPENSES

The Administration & General (A&G) expenses for MSETCL comprise rent, rates and taxes,
telephone and postage, conveyance and travel, security arrangements, printing and stationery
and other miscellaneous expenses.

MSETCL projected A&G expenses of Rs. 39.7 Crore in FY 2004-05, Rs. 41 Crore in FY
2005-06 and Rs. 43 Crore in FY 2006-07, net of capitalisation. MSETCL considered increase
in the A&G expenses at a nominal rate of 5% p.a. in FY 2005-06 and FY 2006-07, over FY
2004-05 and FY 2005-06 levels, respectively. MSETCL has assumed a capitalisation rate of
15% for A&G expenses in FY 2005-06 and FY 2006-07, based on past trends.

Commission’s Analysis and Decisions                                               Page 33 of 33
MERC, Mumbai
 Case No. 49 of 2005                                       MERC ARR Order for MSETCL for FY 2006-07


 For estimating the A&G expenses of MSETCL for FY 2005-06 the Commission has
 considered a year-on-year (YoY) increase of 4.21% over the A&G expenses as approved by
 the Commission in its earlier Tariff Order for FY 2004 (Tariff Order dated 10th March 2004
 for MSEB as a whole). For estimating the A&G expenses of MSETCL for FY 2006-07, the
 Commission has considered a year-on-year (YoY) increase of 4.21% over the A&G expenses
 of the previous year.

 The A&G expenses have been capitalized at the average capitalization rate observed in the
 past three years (for employee expenses and administration and general expenses for MSEB
 as a whole).

 The A&G expenses projected are for MSETCL as a whole including the SLDC function. The
 SLDC budget has been approved by the Commission separately vide Order dated 16.05.2006
 in case No. 30 of 2005. Thus, the A&G expenses considered by the Commission for
 MSETCL in FY 2006-07, has been adjusted net of the A&G expenses of SLDC function.

 The net A&G expenses approved by the Commission for FY 2005-06 is Rs 25.08 Crore and
 for FY 2006-07 is Rs. 24.53 Crore. The details of the A&G expenditure projected by
 MSETCL and that allowed by the Commission is presented in the following Table:

                       Table: Administration & General Expenses (Rs. Cr)

                                                FY 2005-06         FY 2006-07
                       Particulars           ARR       MERC       ARR     MERC
                                            Petition Approval Petition Approval
             Gross A&G Expenses                 48.22      27.26    50.63     28.41
             Capitalisation rate                  15%    8.00%       15%    8.03%
             Expenses capitalised                 7.23      2.18     7.59      2.28
             Net A&G Expenses                   40.99      25.08    43.04     26.13
             Less: SLDC A&G expenses                -         -        -       1.60
                                                                #
             A&G Expenses                       40.99    25.08      43.04     24.53
# For FY 2005-06, the A&G expenses are inclusive of the SLDC function.

 12.      DEPRECIATION EXPENDITURE

 For FY 2005-06, MSETCL has considered the depreciation rate on the basis of the actual
 depreciation rates for each group of assets as recorded in the books of MSETCL, which is
 based on the depreciation rates notified by the Ministry of Power (MoP) vide its circular in
 1994. On this basis, MSETCL has projected depreciation expenses of Rs. 491.78 crore in FY
 2005-06.

 The actual depreciation charged over the past three years as a percentage of the opening gross
 block of assets of the Transmission function/ MSETCL works out to 5.99% on an average (in
 line with the principles enunciated in the MERC Order for MSEB as a whole, dated
 10.03.2004), and the Commission has applied this percentage to arrive at the allowable
 depreciation for FY 2005-06. The depreciation expenditure allowed by the Commission in FY
 2005-06 is Rs. 498.09 crore.

 Commission’s Analysis and Decisions                                                  Page 34 of 34
 MERC, Mumbai
Case No. 49 of 2005                                     MERC ARR Order for MSETCL for FY 2006-07


The depreciation expenses for the year 2006-07 have been calculated by MSETCL by using
the depreciation rates prescribed under the MERC (Terms and Conditions of Tariff)
Regulations, 2005. Thus, the depreciation expenditure is projected at Rs. 265.7 Crore in FY
2006-07. The Commission has noted that depreciation claimed by MSETCL for FY 2006-07
is in line with the MERC (Terms and Conditions of Tariff) Regulations, 2005, and
accordingly approves the depreciation as proposed by MSETCL for FY 2006-07.

The MERC (Terms and Conditions of Tariff) Regulations, 2005 also provide for Advance
Against Depreciation (AAD), in case the repayment obligations are higher than the
depreciation expenditure computed as per the Schedule prescribed under the Regulations.
MSETCL has stated that the scheme-wise repayments and scheme-wise depreciation details
are not available, and hence it is not possible to compute the cumulative depreciation and the
cumulative loan repayment as stated in the Commission’s Tariff Regulations. Hence,
MSETCL has projected the Advance against depreciation by comparing the depreciation
during the year with the loan repayment during the year for FY 2006-07. As the loan
repayment during FY 2006-07 is higher than the depreciation during FY 2006-07, there is a
need to provide for advance against depreciation, which is computed as the difference
between the loan repayment for the year and the depreciation expense for the year, which
works out to Rs. 199.37 crore, as projected by MSETCL.

The MERC (Terms and Conditions of Tariff) Regulations, 2005 state the following with
regard to AAD:

Regulation 50.4.2: “In addition to depreciation, the Transmission Licensee shall be entitled to
Advance Against Depreciation, computed in accordance with Regulation 48.3 above.”

Regulation 48.3: “ Where the actual amount of loan repayment in any financial year exceeds
the amount of depreciation allowable under Regulation 50.4.1, the Transmission Licensee
shall be allowed an advance against depreciation for the difference between the actual
amount of such repayment and the allowable depreciation for such financial year:

Provided that the advance against depreciation shall be restricted to 1/10th of the principal
amount of loans that are to be repaid in such financial year minus the amount of depreciation
allowable under Regulation 50.4.1 …. ”

The Commission has computed the AAD in line with the MERC (Terms and Conditions of
Tariff) Regulations, 2005. The Commission has computed the AAD based on the loan
repayment for the year (which has been recomputed, by taking into account loan outstanding
as per the Provisional Transfer Scheme as on 31st March 2004, and making adjustments for
borrowings, repayment of loans disallowed, etc. for subsequent years, which has been
discussed subsequently) and the depreciation expense for the year. Based on this, the
Commission has allowed AAD of Rs.36.89 Crore.

Details regarding the Principal amount of loans to be repaid in FY 2006-07 were not available
to the Commission, and hence given the data constraint, the Commission has allowed the
amount of AAD as discussed above.

Commission’s Analysis and Decisions                                                Page 35 of 35
MERC, Mumbai
Case No. 49 of 2005                                      MERC ARR Order for MSETCL for FY 2006-07


The Table below summarizes the Depreciation and AAD allowed by the Commission for FY
2005-06 and FY 2006-07.

                Table: Depreciation for FY 2005-06 and FY 2006-07 (Rs. Cr)

                                               FY 2005-06        FY 2006-07
                      Particulars           ARR      MERC      ARR     MERC
                                           Petition Approval Petition Approval
                          #
           Opening GFA                      8,322.37 8,322.37 8,452.79 8,452.79
           Avg. Depreciation rate %           5.91%     5.99%   3.14%     3.14%
           Depreciation                       491.78    498.09  265.70    265.70

           Advance against depreciation           -          -      199.37      36.89
# The opening GFA considered for FY 2005-06 and FY 2006-07 is for MSETCL as a State Transmission
Utility and does not include GFA of the SLDC function.

13.      CAPITAL EXPENDITURE

The capital expenditure incurred by the Transmission function/ MSETCL was Rs. 297.13
Crore in FY 2004-05 and Rs. 227.07 Crore in FY 2005-06. MSETCL has proposed capital
expenditure of Rs. 1,054 Crore in FY 2006-07.

MSETCL has submitted a 3 year Infrastructure Rolling Plan for FY 2006-07 to FY 2008-09
to the Commission for approval and based on the Commission’s initial review and
observations on the same, MSETCL has submitted a Revised 3-year Infrastructure Rolling
Plan for FY 2006-07 to FY 2008-09. On the basis of the Revised 3-year Infrastructure Rolling
Plan and Capitalization data submitted by MSETCL, MSETCL has proposed capital
expenditure of Rs. 1,054 Crore in FY 2006-07 and projected capitalization of Rs. 948.97
Crore in FY 2006-07.

The Commission has however noted certain inadequacies in the Three Year Rolling Plan
submitted by MSETCL. The Commission has provided detailed instructions to MSETCL in
this regard separately. The three year Rolling Plan should be first approved by the MSETCL
Board and should then be submitted to the Commission for scrutiny and approval. The
Commission has also directed MSETCL to remove the inadequacies in the system study
report based on which MSETCL’s 3-year rolling plan is prepared. The existing system
loading condition, voltage and constraints are to be clearly shown on the network plan to
(technically) justify addition (and associated capital expenditure proposed) or strengthening of
existing system, sub-stations and lines along with impact of such addition / strengthening of
the existing network. The Commission has asked MSETCL to first set out the lacuna/
drawbacks in the present transmission system which the plan proposes to address.

The Plan should also give the long term perspective of the direction in which MSETCL would
like the network to develop, which should be clearly specific and meaningful for monitoring
the progressive movement.



Commission’s Analysis and Decisions                                                 Page 36 of 36
MERC, Mumbai
Case No. 49 of 2005                                     MERC ARR Order for MSETCL for FY 2006-07


The Commission has also asked MSETCL to list the order of priority in which the fresh
schemes are proposed to be undertaken in FY 2006-07. Against each scheme, (both
continuing schemes as well as new proposed) the objective of the scheme and how the same
fits into the overall objective of strengthening network in an optimum manner and its likely
benefits in quantified terms and possible impact on tariff as well as reduction in transmission
losses will have to be stated by MSETCL.

In this regard, MSETCL has agreed that the scheme-wise details mentioned above for all the
schemes proposed in FY 2006-07 will be prepared and submitted for perusal of the
Commission by 15th of July 2006.

 The Commission intends to provide critical milestones for completion of schemes. Also, as a
part of the approval of the three year Capex Plan, the Commission would consider the
provision of asking MSETCL to separately submit quarterly report on compliance of the
milestones set by the Commission.

The Commission is of the view that the capital expenditure of Rs. 1,054 Crore proposed by
MSETCL for FY 2006-07 is high and the projected capitalization of Rs. 948.97 Crore for FY
2006-07 is also very high in comparison to past trends in actual capital expenditure incurred
and capitalization achieved on a yearly basis.

The 3-year Infrastructure Rolling Plan of MSETCL for FY 2006-07 to FY 2008-09 is under
examination of the Commission. For the purpose of computation of the ARR, the
Commission has considered an average of the fixed asset capitalization in the past 2 years, as
allowable capital expenditure for FY 2006-07. The Commission has thus considered capital
expenditure of Rs. 196 Crore in FY 2006-07 for the purpose of the ARR computation.
However, this does not mean that the Commission has put an upper cap on the amount of
capital expenditure and consequent fixed asset capitalisation for FY 2006-07. The
Commission will consider the actual capitalization of fixed assets achieved in FY 2006-07 in
the Truing-up Process for the ARR determination for FY 2007-08.

14.      INTEREST AND FINANCE CHARGES

MSETCL has projected interest and finance charges of Rs. 485.51 Crore in FY 2005-06 and
Rs. 488.71 Crore in FY 2006-07. The elements comprising interest and finance charges and
the Commission’s analysis of each sub-head of interest and finance charges is detailed below.


Interest on long term loans

The interest expenditure on account of long-term loans depends on the outstanding loan,
repayments, and prevailing interest rates on the outstanding loans. Further, the projected
capital expenditure and capitalization of fixed assets and the funding of the same also has a
large bearing on the long-term interest expenditure.

MSETCL in its ARR Petition has specified that for FY 2004-05, the actual interest
expenditure incurred by the erstwhile MSEB has been allocated to MSETCL, based on Trial

Commission’s Analysis and Decisions                                                Page 37 of 37
MERC, Mumbai
Case No. 49 of 2005                                     MERC ARR Order for MSETCL for FY 2006-07


Balances and allocation of assets and liabilities considered for the provisional Transfer
Scheme. The outstanding loans in FY 2004-05, include certain Government of Maharashtra
(GoM) loans and other loans, which has been serviced by the erstwhile MSEB. As per the
provisional Transfer Scheme, these GoM loans have not yet been allocated to the Successor
Companies including MSETCL. However, the interest expenditure against these GoM loans
has been considered under MSETCL, while projecting the interest expenditure for FY 2005-
06 and FY 2006-07, as MSETCL is servicing these debts.

MSETCL in its ARR Petition has also stated that the overall interest expenditure and the
average interest rate for loans have reduced in the past two to three years, due to efforts
undertaken by the erstwhile MSEB in this regard.

MSETCL has projected capital expenditure of Rs. 1,054 Crore in FY 2006-07 and has
assumed funding of capital expenditure in the debt: equity ratio of 70:30. The loan amount for
capital expenditure in FY 2006-07 is proposed to be sourced from the Rural Electrification
Corporation at interest rate of 9%.

MSETCL has projected the capitalisation of interest on the basis of past trends, which works
out to 6.3% of long-term interest in that year.

Thus, MSETCL has projected net interest on long-term loans as Rs. 429.01 Crore in FY 2005-
06 and Rs. 428.56 Crore in FY 2006-07.

As per the earlier Tariff Order of MSEB (dated 10th March 2004), the Commission had
disallowed the interest on loans taken for investment in the Dabhol Power Corporation. Thus,
while computing the interest for FY 2005-06 and FY 2006-07, the interest on loans taken for
investment in Dabhol Power Corporation have also been disallowed by the Commission.

Further, the Commission is of the view that as MSETCL is a transmission company, it should
not be investing in power generation projects, and thus loans taken for investment in
generation projects viz. DPC, should be disallowed.

Further, as per the earlier Tariff Order of MSEB (dated 10th March 2004), the Commission
observed that the MSEB has been taking loans to meet its revenue shortfall apart from the
projected capital expenditure. However, the Commission allowed additional loans to the
extent of the projected capital investment only.

Thus, in line with the earlier Tariff Order of MSEB (dated 10th March 2004), the Commission
has allowed additional loans (borrowings for the year) only to the extent of fixed asset
capitalization in FY 2004-05 and FY 2005-06. The Commission has assumed that the
capitalization of fixed assets in FY 2004-05 and FY 2005-06 will be funded entirely by debt
and not by equity, as no equity has actually flown into MSETCL.

In case of FY 2006-07, the Commission has allowed capital expenditure of Rs. 196 Crore
(average of capitalization of fixed assets in the past 2 years) and the loan amount is taken as
70% of the allowable capital expenditure for the year, in line with the MERC (Terms and
Conditions of Tariff) Regulations, 2005.

Commission’s Analysis and Decisions                                                Page 38 of 38
MERC, Mumbai
Case No. 49 of 2005                                       MERC ARR Order for MSETCL for FY 2006-07


Further, in case of additional borrowing made during a year, it is assumed that there would be
a moratorium period of 3 years.

In order to compute the interest on loans, the loan balance outstanding of MSETCL (as per
the Balance Sheet as on 31st March 2004) as per the provisional Transfer Scheme has been
considered as the Opening loan balance in FY 2004-05. The loans held by the Holding
Company (which have not been allocated to the successor companies) have not been
considered while computing loans and interest of MSETCL. In addition, adjustments have
been made to the loans such as disallowing DPC loans, allowing additional loans only to the
extent of capitalization of fixed assets, adjustments for repayment in case of loans disallowed,
etc.

The interest rate considered is the average interest rate for each of the years as given in the
MSETCL ARR Petition. The interest has been computed by applying the average interest rate
for the year on the average of opening and closing loan balances for the year. The
Commission has considered the same rate of capitalization for interest expenses as projected
by MSETCL.

Thus, the Commission has allowed interest expense (net of capitalisation) of Rs. 289.14
Crore in FY 2005-06 and Rs. 275.4 Crore in FY 2006-07.

                                Table: Interest on loans (Rs. Cr)
                                                  FY 2005-06         FY 2006-07
                      Particulars              ARR      MERC       ARR     MERC
                                              Petition Approval Petition Approval
          Gross Interest on long term loans      457.86    308.58   457.37    293.92
          Less: expenses capitalised              28.85      19.44   28.81      18.52
          Net Interest Expenses                  429.01    289.14   428.56    275.40

Other Interest and Finance charges

The other interest and finance charges comprise the following heads:

§   Guarantee fee payable to Government of Maharashtra (GoM) for long-term loans taken
    from lenders

§   Other Finance Charges

MSETCL has projected the other interest and finance charges to remain constant at FY 2004-
05 level of Rs. 30.42 crore, in FY 2005-06 and FY 2006-07 also. The Commission has
allowed the other interest and finance charges as projected by MSETCL for FY 2005-06 and
FY 2006-07.


Interest on Working Capital

The working capital funds of MSETCL are arranged through a combination of sources such
as bill discounting, short-term loans from REC and other sources, buyers’ line of credit, and
cash credit. MSETCL has projected the quantum of working capital for FY 2005-06 and FY

Commission’s Analysis and Decisions                                                  Page 39 of 39
MERC, Mumbai
 Case No. 49 of 2005                                            MERC ARR Order for MSETCL for FY 2006-07


 2006-07 in accordance with the MERC (Terms and Conditions of Tariff) Regulations, 2005.
 The rate of interest on working capital loans for FY 2006-07 has been considered as 10.25%.

 The Commission has estimated the working capital requirement of MSETCL for FY 2005-06,
 as 0.75 x (Current Assets – Current Liabilities); in line with the Commission’s computation in
 the previous Tariff Order for MSEB as a whole. For computing the working capital
 requirement for MSETCL for FY 2005-06, the details of current assets and current liabilities
 of MSETCL as provided in the Provisional Transfer Scheme have been used. Based on the
 same, the working capital of MSETCL is negative, and thus the Commission has considered
 ‘Nil’ interest on working capital in FY 2005-06.

 For FY 2006-07, the Commission has computed interest on working capital as per the MERC
 (Terms and Conditions of Tariff) Regulations, 2005. The rate of interest on working capital
 loans for FY 2006-07 has been considered as 10.25% (in line with the MERC (Terms and
 Conditions of Tariff) Regulations, 2005).

 The interest on working capital as projected by MSETCL and approved by the Commission is
 shown in the Table below:

                              Table: Interest on Working Capital (Rs. Cr)
                                                            FY 2005-06               FY 2006-07
                           Particulars                   ARR      MERC            ARR      MERC
                                                        Petition Approval        Petition Approval
    Computation of working capital
    One-twelfth of the amount of Operation and
    Maintenance Expenses                                    34.18           -        38.92       32.34
    One-twelfth of the sum of the book value of
    stores, materials and supplies                          18.03           -        19.32       19.32
                                       @
    1.5 months of expected revenue from sale of
    electricity at the prevailing tariffs                  208.55           -       231.79      174.14
    Less:
    Amount of Security Deposit from Transmission
    System Users                                                -           -           -           -
    Total Working Capital                                  260.76           -       290.03      225.80

    Alternative Computation of working capital
                       #
    Current Assets (excluding cash)                              -       87.00           -            -
    Less: Current Liabilities                                    -      507.29           -            -
    Net Current Assets                                           -     -420.29           -            -
    Working Capital (0.75*Net Current Assets)                    -     -315.22           -            -

    Computation of working capital interest
    Rate of Interest (% p.a.)                                10%       10.25%      10.25%      10.25%
    Interest on Working Capital                             26.08          -         29.73       23.14
@ For purpose of computation of working capital, the expected revenue is considered as the ARR amount
# Note: Considering the Current Assets (including cash), the net current assets is still negative, and thus
working capital interest would be ’Nil’.


 Commission’s Analysis and Decisions                                                         Page 40 of 40
 MERC, Mumbai
Case No. 49 of 2005                                        MERC ARR Order for MSETCL for FY 2006-07


15.      OTHER EXPENSES

The other expenses for MSETCL comprise the loss on exchange rate variations on the foreign
currency loans. MSETCL expects there to be a gain of Rs. 0.28 Crore in FY 2005-06 on
exchange rate variation based on provisional accounts, while a loss of Rs. 1.41 Crore on
exchange rate variation has been estimated for FY 2006-07. The Commission has allowed the
amount of other expenses as projected by MSETCL.

16.      INCOME TAX

MSETCL in its ARR Petition has indicated that the erstwhile MSEB was not liable to pay
income tax, and was hence neither paying income tax nor recovering the same through tariffs,
till FY 2004-05. However, after the formation of separate Companies under the Companies
Act, 1956, the successor Companies (MSPGCL, MSETCL and MSEDCL) are liable to pay
income tax in FY 2005-06 (from June 6, 2005) and FY 2006-07. The MERC (Terms and
Conditions of Tariff) Regulations, 2005, has also considered income tax as a legitimate
element of fixed costs to be recovered through the tariffs.

MSETCL has shown income tax payment of Rs. 41.01 Crore in FY 2005-06 and projection of
Rs. 41.99 Crore in FY 2006-07. The Commission has approved the income tax amount for FY
2005-06, as this is based on actual advance tax paid by MSETCL to the Income Tax
authorities for the year. However, MSETCL should examine and claim refund of the same
based on the actual financials for FY 2005-06 and past financial losses. The income tax
refund received for FY 2005-06 would be trued up during the ARR determination for FY
2007-08.

For FY 2006-07, the Commission has considered the income tax as ‘Nil’ as no advance tax
has been paid by MSETCL to the Income Tax authorities, for the year so far (as per the
submissions of MSETCL till date). Further, as erstwhile MSEB has accumulated financial
losses of Rs. 1,872 Crore (as per the MSEB Accounts as on 31st March 2005), the tax losses
on account of depreciation and operations would also be significant, and thus, it is considered
that there would be no income tax payable in FY 2006-07.

                                      Table: Income Tax (Rs. Cr)
                                                FY 2005-06        FY 2006-07
                      Particulars            ARR      MERC       ARR     MERC
                                            Petition Approval Petition Approval
              Income Tax                        41.01      41.01   41.99      -


17.      SERVICE TAX LIABILITY

The Central Board of Excise & Customs, Government of India, has initiated an enquiry
regarding alleged evasion of Service Tax by the MSETCL, through its Notices dated 20th
January 2006 and 27th January 2006. The MSETCL is contesting this Notice, as in the opinion
of MSETCL, no service tax is payable on transmission of electricity. In the absence of clarity
on MSETCL’s liability to pay the service tax, MSETCL has not considered payment of
Commission’s Analysis and Decisions                                                   Page 41 of 41
MERC, Mumbai
Case No. 49 of 2005                                     MERC ARR Order for MSETCL for FY 2006-07


service tax as an expense in the ARR. However, in the event that MSETCL has to pay this
Service Tax, then it will have to be passed through the transmission tariff. In such an event,
MSETCL has stated that it reserves the right to approach the Hon’ble Commission for pass
through of these costs in the tariff, at a later stage.

The Commission has not considered service tax as an expense in the ARR for FY 2006-07.
However, the Commission advises MSETCL to take up the matter of exemption of service tax
with the concerned authorities and settle the issue expeditiously.

18.      CONTRIBUTION TO CONTINGENCY RESERVES

MSETCL has projected the contribution to contingency reserves as 0.5% of opening GFA (in
line with MERC (Terms and Conditions of Tariff) Regulations, 2005), which amount to Rs.
41.61 Crore in FY 2005-06 and Rs. 42.26 Crore in FY 2006-07.

The Commission has disallowed the contingency reserve amount projected for FY 2005-06,
as there was no provision for the same in the earlier MSEB Tariff Order (dated 10.03.2004).
Further, the MERC (Terms and Conditions of Tariff) Regulations, 2005 are applicable while
approving the ARR from FY 2006-07.

The Commission has allowed the contribution to contingency reserves as projected by
MSETCL for FY 2006-07, as this is in line with MERC (Terms and Conditions of Tariff)
Regulations, 2005.

                             Table: Contingency Reserves (Rs. Cr)
                                                FY 2005-06           FY 2006-07
                      Particulars            ARR      MERC        ARR      MERC
                                            Petition Approval    Petition Approval
         Contingency reserves                   41.61       -        42.26      42.26


19.      NON-TARIFF INCOME

MSETCL earns non-tariff income, from activities such as sale of scrap, sale of tender forms,
and miscellaneous receipts. The non-tariff income has been projected by MSETCL as Rs. 7.6
Crore and Rs. 6.5 Crore, in FY 2005-06 and FY 2006-07, respectively. As there are no past
trends for non-tariff income of MSETCL and as the non-tariff income is miscellaneous
income, the Commission has allowed the non-tariff income projected by MSETCL for FY
2005-06 and FY 2006-07.

20.      RETURN ON EQUITY

The erstwhile MSEB was entitled to earn a surplus of 4.5% of its Net Fixed Assets (NFA),
after meeting all its expenses, in accordance with the provisions of S.59 of the erstwhile
Electricity (Supply) Act, 1948. The MSETCL was created under the provisions of the
provisional Transfer Scheme, which was made effective from June 5, 2005. Accordingly, for
FY 2004-05 and FY 2005-06, MSETCL has projected return on the basis of 4.5% of its NFA,
Commission’s Analysis and Decisions                                                Page 42 of 42
MERC, Mumbai
Case No. 49 of 2005                                      MERC ARR Order for MSETCL for FY 2006-07


For FY 2006-07, MSETCL has projected proportionate return on equity (RoE) at the rate of
14% on the opening equity at the beginning of the year and 50% of the equity portion (30%)
of the projected capital investment, in accordance with the MERC (Terms and Conditions of
Tariff) Regulations, 2005. MSETCL has projected a return on Rs. 206.24 Crore in FY 2005-
06 and Rs. 354.35 Crore in FY 2006-07.

The Commission has allowed the Return shown by MSETCL for FY 2005-06, as this is based
on Return of 4.5% on NFA, and this is in line with the principles of the earlier Tariff Order
for MSEB as a whole. Further, as the other components of the ARR viz. R&M expenses,
A&G expenses, etc. for FY 2005-06 are computed in line with the principles of the earlier
Tariff Order for MSEB as a whole, therefore, Return should also be computed on the basis of
the principles enunciated in the earlier Tariff Order for MSEB as a whole.

For FY 2006-07, the Commission has computed the Return on equity as per the MERC
(Terms and Conditions of Tariff) Regulations, 2005. The capitalisation of fixed assets in FY
2006-07 is assumed to be funded by Debt: Equity of 70:30, as proposed by MSETCL in their
ARR Petition, which is in line with the MERC Regulations. For the purpose of ARR
computation, the Commission has considered the fixed asset capitalisation for FY 2006-07 as
the average fixed asset capitalisation of the past 2 years (average works out to Rs. 196 Crore).

The Opening equity of MSETCL for FY 2006-07, is taken from the Balance Sheet of
MSETCL (as on 31st March 2004) as given in the Provisional Transfer Scheme of erstwhile
MSEB. It is assumed that the additional capitalisation upto FY 2006, would be funded
entirely by debt, and there would be no additional equity.

On this basis, the RoE for FY 2006-07 amount to Rs. 336.34 Crore.



                  Table: Return on Equity/ Surplus for FY 2005-06 (Rs. Cr)
                                                            FY 2005-06
                                   Particulars           ARR       MERC
                                                        Petition Approval
                      Opening GFA                        8,322.37 8,322.37
                      Less accumulated depreciation      3,739.21 3,739.21
                      Net Fixed Assets                   4,583.16 4,583.16
                      Less: Consumers contribution              -         -
                      Capital Base                       4,583.16 4,583.16
                      Surplus (4.5% of capital base)       4.50%      4.50%
                      Surplus                              206.24    206.24




Commission’s Analysis and Decisions                                                 Page 43 of 43
MERC, Mumbai
 Case No. 49 of 2005                                             MERC ARR Order for MSETCL for FY 2006-07


                          Table: Return on Equity for FY 2006-07(Rs. Cr)
                                                                   FY 2006-07
                                    Particulars                  ARR      MERC
                                                                Petition Approval
                       Regulatory Equity at beginning of year          2,373       2,373
                                                                                        #
                       Capital expenditure                             1,054        196
                       Equity portion of capital expenditure             316        58.8
                       Regulatory Equity at end of year                2,689       2,432

                       Return on Regulatory Equity at the
                       beginning of the year                          332.22      332.22
                       Return on Equity portion of capital
                       expenditure                                     22.13        4.12
                       Total Return on Regulatory Equity              354.35      336.34
# For the purpose of computation of the ARR, the Commission has considered an average of the fixed
asset capitalization in the past 2 years, as allowable capital expenditure for FY 2006-07. The
Commission has thus considered capital expenditure of Rs. 196 Crore in FY 2006-07 for the purpose of
the ARR computation. However, this does not mean that the Commission has put an upper cap on the
amount of capital expenditure and consequent fixed asset capitalisation for FY 2006-07. The Commission
will consider the actual capitalization of fixed assets achieved in FY 2006-07 in the Truing-up Process
for the ARR determination for FY 2007-08.

 The Commission has instituted a truing up mechanism where in the actual expenses and the
 actual revenue will be trued up at the end of the year based on audited financial results and
 subject to a prudence check. Thus, the amount shown as equity and return thereon would be
 trued up based on the actual additional equity used to fund the capital expenditure. Similarly,
 the amount of additional loan would be trued up based on the actual loan borrowed by
 MSETCL during the year.

 21.        ANNUAL REVENUE REQUIREMENT

 The Annual Revenue Requirement of MSETCL is the summation of all the expenses and the
 RoE as computed above, less non-tariff income, and has been summarized below:

                           Table: Annual Revenue Requirement (Rs. Cr)
                                                               FY 2005-06        FY 2006-07
                         Particulars                        ARR      MERC     ARR      MERC
                                                           Petition Approval Petition Approval
       Operation & Maintenance Expenses                      410.13    375.55  467.08     388.09
       Employee Expenses                                     264.28    289.66  297.13     303.96
       Administration & General Expenses                      40.99     25.08    43.03      24.53
       Repair & Maintenance Expenses                         104.86     60.81  126.92       59.60
       Depreciation, including advance against
       depreciation                                          491.78      498.09       465.07     302.59
       Interest on Long-term Loan Capital                    429.01      289.14       428.56     275.40
       Other Interest & Finance Charges                       30.42       30.42        30.42      30.42
       Working Capital interest                               26.08          -         29.73      23.14
       Other Expenses (loss on exchange rate variations)      -0.28       -0.28         1.41       1.41
       Income Tax                                             41.01       41.01        41.99         -
 Commission’s Analysis and Decisions                                                           Page 44 of 44
 MERC, Mumbai
Case No. 49 of 2005                                     MERC ARR Order for MSETCL for FY 2006-07


                                                     FY 2005-06        FY 2006-07
                        Particulars               ARR      MERC     ARR       MERC
                                                 Petition Approval Petition Approval
      Contribution to contingency reserves          41.61        -     42.26      42.26
      Total Revenue Expenditure                  1,469.76 1,233.93 1,506.52 1,063.33
      Return on Equity Capital                     206.24    206.24  354.35     336.34
      Annual Revenue Requirement                 1,676.00 1,440.17 1,860.87 1,399.66
      Less: Non Tariff Income                         7.60      7.6      6.52      6.52
      Annual Revenue Requirement                 1,668.40 1,432.57 1,854.35 1,393.14


22.        IMPACT OF SLDC CHARGES AND RLDC CHARGES

MSETCL had submitted a separate proposal to the Commission for approval of SLDC budget
for FY 2006-07. The Commission in its Order dated 16th May 2006 in Case No. 30 of 2005,
approved MSETCL’s proposal for approval of SLDC Budget for FY 2006-07. The
Commission approved the SLDC budget for Rs. 15.51 Crore for FY 2006-07 (The SLDC
budget approved by the Commission includes an amount of Rs.2.3 Crore on account of RLDC
fees and charges).

The Commission has not determined or approved any SLDC fees and charges for FY 2006-07
(as on the date of this Order).

The Commission directs that the SLDC Budget approved by the Commission will be treated
separately and will not be included as a part of the MSETCL ARR for FY 2006-07. The SLDC
budget will be separately recovered from MSEDCL for FY 2006-07. The above arrangement
would be in force for FY 2006-07 only.

23.        TRUING UP MECHANISM

The Commission has instituted a truing up mechanism where in the actual expenses and the
actual revenue will be trued up at the end of the year based on audited financial results and
subject to a prudence check. This will enable MSETCL to recover/refund any shortfall/excess
Revenue from/to the transmission system users at the end of the year, as per the directions of
the Commission.

24.        TARIFF PHILOSOPHY

The Commission has already notified the “MERC (Transmission Open Access) Regulations,
2005” for the state of Maharashtra. As per the Transmission Open Access Regulations, the
Commission is required to determine the charges for use of the intra-state transmission
system. The Commission is separately working on the determination of Transmission Pricing
for the intra-state transmission system and has already floated a Discussion Paper on Intra-
state Transmission Pricing and related issues on 12th January 2006. Subsequently a Public
Hearing has also been held in this context on 17th April 2006 at Mumbai and various
Licensees in the state have submitted their comments on the Discussion Paper and
methodology to be adopted for determination of transmission pricing.

Commission’s Analysis and Decisions                                                Page 45 of 45
MERC, Mumbai
Case No. 49 of 2005                                     MERC ARR Order for MSETCL for FY 2006-07


The Commission has issued its Order in respect of the intra-state transmission pricing
framework on 27th June, 2006, which is applicable for the intra-state transmission system. The
Annual Revenue Requirement (ARR) as approved by the Commission for MSETCL for FY
2006-07 in this Order will be used as a part of the composite ARR determination of the
complete intra-state transmission system of all transmission licensees in the state for FY
2006-07.

Hence, in this Order, the Commission has only determined the ARR for MSETCL for FY
2006-07 and not issued any transmission tariff for MSETCL alone. However, the Commission
will consider truing up for actual audited expenses, etc. for FY 2006-07 of MSETCL as a part
of the determination of ARR for FY 2007-08 and this will form input to the determination of
intra-state transmission pricing for FY 2007-08.

The Commission understands that currently MSETCL is transmitting central sector power to
Goa via its transmission network and the transmission charges for the same are being levied
as per the prevailing Regional norms. However, the Commission is of the view that as this
power is being transmitted by the transmission lines (of MSETCL) within the State, the
transmission tariff as determined by the Commission (in line with its Order dated 27th June,
2006) should be applicable for the quantum of energy transmitted to Goa. The Commission
therefore directs MSETCL to levy the transmission tariff as determined by the Commission in
its order on intra-state transmission pricing through transmission open access provision.

25.      REVENUE FROM REVISED TARIFFS

The Revenue for MSETCL for FY 2006-07 will be as per tariff as determined by the
Commission under its Order on intra-state transmission pricing.

26.      OTHER DIRECTIVES

The Commission directs MSETCL to submit scheme-wise details mentioned earlier in this
Order for all the schemes proposed in FY 2006-07 for perusal of the Commission by 15th of
July 2006. The Commission also directs MSETCL to review the Protection System
Performance on historical performance, current weaknesses and lacunae and future
strengthening required as a part of its three year Rolling Plan for Transmission System Capital
Expenditure.

Till the time the SLDC is notified by the State Government to be operated as a Government
Company or as an Authority or as a Corporation, MSETCL shall operate the SLDC and shall
make a working arrangement with SLDC to function as an independent unit and build its
capabilities.

27.      APPLICABILITY OF ORDER

The Order for FY 2006-07 will be valid till 31st March 2007 and MSETCL is directed to
submit their Multi Year Tariff Petitions for the first control period commencing from FY
2007-08 onwards by 30th November 2006.
Commission’s Analysis and Decisions                                                Page 46 of 46
MERC, Mumbai
Case No. 49 of 2005                                     MERC ARR Order for MSETCL for FY 2006-07


The Commission acknowledges the efforts taken by the Consumer Representatives and other
individuals and organisations, viz., (i) Prayas Energy Group (ii) Thane Belapur Industries
Association (iii) Maharashtra Elektrosmelt Ltd. and (iv) Kolhapur Engineering Association
for their valuable contribution to the ARR determination process.

The Commission would also like to put on record, the efforts of its advisors, M/s A. F.
Ferguson & Co.

This ARR Order for FY 2006-07 shall come into force with effect from the date of this Order.



    Sd/-                                  Sd/-                       Sd/-
(S. B. Kulkarni)                      (A. Velayutham)            (Pramod Deo)
Member                                Member                     Chairman, MERC




                                                                             (Malini Shankar)
                                                                             Secretary, MERC




Commission’s Analysis and Decisions                                                Page 47 of 47
MERC, Mumbai
Case No. 49 of 2005                                          MERC ARR Order for MSETCL for FY 2006-07




                                            APPENDIX 1

List of persons who attended the Technical Validation Session held on 26th April
2006

  Sr. No.        Name of Person/ Official             Designation                  Institution
    1.       S.G. Kelkar                       CE                           MSETCL
    2.       A.V. Deshpande                    CGM                          MSETCL
    3.       S.S. Kulkarni                     EE                           MSETCL
    4.       G.S. Limaye                       ED                           MSETCL
    5.       V.T. Phirke                       EE (TRC)                     MSETCL
    6.       N.R. Sonkauday                    EE                           MSETCL
    7.       A.D. Palamwar                     Dir (O)                      MSETCL
    8.       V.M. Mathor                       S.E.                         MSETCL
    9.       A.K. Deshmukh                     E.D.                         MSETCL
    10.      V.M. Latey                        CE                           MSETCL
    11.      A.J. Deshpande                    SE (TRC)                     MSEDCL
    12.      S.E. Rane                         A.O. (F&A)                   MSETCL
    13.      Shrikant Thorat                   Sr. Manager                  A.F.Ferguson & Co.
    14.      Shaheen Chinoy                    Sr. Consultant               A.F.Ferguson & Co.
    15.      Girish M                          Sr. Analyst                  ICRA
    16.      Amit Mittal                       Analyst                      ICRA
    17.      N.P. Shahar                       Sr. Manager                  NTPC
    18.      A.N. Chafale                      P.A. to Dir (Op)             MSETCL
    19.      K.A. Chafale                      J.E.                         MSETCL
    20.      Nikit Abhyankar                                                Prayas
    21.      B.E. Musih                        EE                           MSEB
    22.      S.J. Amberkar                     GM (F&A)                     MSETCL




Appendix                                                                                 Page 48 of 48
MERC, Mumbai
       Case No. 49 of 2005                                       MERC ARR Order for MSETCL for FY 2006-07



                                               APPENDIX 2

       List of Objectors


S. No.       Name of the Objector        Organization & Address        Attended Public      Spoke at Public
                                                                           Hearing             Hearing
 A.       Consumer Representative u/s. 26 of the ERC Act, 1998
 1.       Nikit Abhyankar           Prayas Energy Group,               Attended           Yes
                                    4, Om Krishna Kunj Society,
                                    Opp. Kamla Nehru Park,
                                    Ganagote Path, Erandavane,
                                    Pune – 411 004
  2.      Representative            Mumbai Grahak Panchayat,           Not Attended       No
                                    Grahak Bhavan,
                                    Sant Dyaneshwar Marg,
                                    Behind Cooper Hospital,
                                    Vile Parle (W),
                                    Mumbai – 400 056
  3.      Representative            Thane Belapur Ind. Association,    Attended           Yes
                                    Plot No. P-14, MIDC,
                                    Rabale Village, P.O. Ghansoli,
                                    Navi Mumbai - 400 701
  4.      Representative            Vidarbha Industries Association,   Not Attended       No
                                    1st Floor, Udyog Bhawan,
                                    Civil Lines, Nagpur – 440 001
 B.       Objections/ Suggestions
 5.       Shri R. Ashok Kumar,      Maharashtra Elektrosmelt Ltd.      Attended           Yes
          Company Secretary         10, Nirmal Building,
          represented by Shri       Nariman Point,
          Prit Pal Singh            Mumbai – 400 021


  6.      Shri Sanjeev Potdar,    Kolhapur Engineering                 Not Attended       No
          Secretary               Association,
                                  Madhavrao Karajgar Road,
                                  Shivaji Udyamnagar,
                                  Kolhapur – 416 008
 C.       Reply by Applicant (MSETCL)
 7.       Shri Jayant Kawale, MD- MSETCL                               Attended           Yes
          MSETCL
          S.S. Tamotia, Director




       Appendix                                                                             Page 49 of 49
       MERC, Mumbai
Case No. 49 of 2005                                 MERC ARR Order for MSETCL for FY 2006-07




List of persons who attended the Public Hearing on 13th June 2006


     Sr. No.           Name of the Person      Designation and Institution/ Company
        1.       S.G. Kelkar                CE, Ind, MSETCL
        2.       V.T. Phirke                EE (TRC), MSETCL
        3.       G.J.Kolhe                  MSETCL
        4.       K.A. Chafale               MSETCL
        5.       N.R. Sonkauely             MSETCL
        6.       S.S. Kulkarni              EE (Corp Planning) MSETCL
        7.       G.S. Limaye                MSETCL
        8.       A.K. Deshmukh              E.D., MSETCL
        9.       Shishir Tamotia            Director (O), MSETCL
       10.       K. Srikant                 Student, MBA-PM UPES – Delhi
       11.       A. Gundawar                Student, MBA-PM UPES – Delhi
       12.       A.V. Deshpande             MSETCL
       13.       S.A. Nikage                MSPGCL
       14.       R.S. Pandey                Ispat
       15.       R. Balachandran            Ispat
       16.       D.W. Jore                  Hindustan Times
       17.       S.J. Amberkar              MSETCL
       18.       S.E. Rane                  MSETCL
       19.       S.D. Sone                  MSETCL
       20.       Vinayak Rao                Dir (F), MSETCL
       21.       S.R. Patil                 S.E., MSEDCL
       22.       Jayant Kawale              MD, MSETCL
       23.       Rajan Divekar              Director, A.F.Ferguson & Co.
       24.       Shrikant Thorat            Senior Manager, A.F.Ferguson & Co.
       25.       Shaheen Chinoy             Senior Consultant, A.F.Ferguson & Co.




Appendix                                                                         Page 50 of 50
MERC, Mumbai

								
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