Discussion Paper on Terms and Conditions of Tariff

1. Discussion Paper on Terms and Conditions of Tariff November 12, 2003 GMR Group

2. Objective of Tariff Norms • Provide incentive for investors for realizing the “power for all” target • Tariff norms that reflect opportunity cost for a given business risk • To reduce cost of generation in addition to reducing fixed cost • Reduce taxes • Reduce fuel cost GMR Group

3. Fixed Cost Recovery • Fixed cost recovery should be different for coal and gas plants • Coal plants at [70% ] availability • Gas and liquid plants at [75%] availability GMR Group

4. Return on Equity • The current guideline on Return on Equity of 16% may be continued • The ROE method has been in practice and well understood while ROCE method is complicated to implement • The ROE is linked to risk of business and not interest on debt • There is no return during construction (for 3-5 years) • Project finance debt interest rate is about 11% based on the type of project and risks etc. • Normative Debt: Equity at 70:30 may be continued • FE adjustment for both debt and equity • Interest as a “pass through” may be continued GMR Group

5. Interest on Working Capital • Existing norms may be continued • The Coal companies are demanding I (one) month L/C and I (one) month cash advance (equivalent to supply of coal) and the cost of L/C and cash advance should be included for the working capital norm GMR Group

6. Depreciation • The existing norm of depreciation may be continued • Allows repayment of loans, tenors are usually for 10-12 years for power projects • Provides cash for additional capacity • Advance against depreciation etc. would lead to micro-management by and burden on the Regulatory Commissions GMR Group

7. Operation and Maintenance (O&M) • The current O&M norm of 2.5% of capital cost is low • O&M norm should be different for coal (lignite) and gas (liquid) fuel plants • O&M should escalate on the basis of WPI • O&M should vary with age • The suggested base O&M norm as % of capital cost as of COD: GMR Group

8. Other Operating Parameters • Heat Rate • Heat Rate for coal Plants of 2500 Kcal/ kWh to be continued • Heat Rate for gas/ liquid fuel plants 2000 Kcal/ kWh (Combined Cycle) and 2900 kcal/ kWh (Open) Cycle may be continued • Justified based on existing data • Also need to account for load fluctuations, degradation (esp. in case of gas based plants), etc. • The condition “whichever is less” may be removed to incentivise operations to be efficient GMR Group

9. Other Operating Parameters • Specific Fuel Oil Consumption and Auxiliary Energy Consumption • The existing norms may be continued • The condition “whichever is less” may be removed to incentivise operations to be efficient • Incentive for higher availability • The existing norm may be continued GMR Group

10. Additional Points for Reducing Cost of Generation • Reduction in taxes • Customs duty on capital goods import: 21.8% • Customs duty on spares: 50.8 • Sales taxes 12-16% • Taxes on fuel • Impact of taxes on capital cost (Base Cost : 100) GMR Group

11. Additional Points for Reducing Cost of Generation • Reduction fuel cost • Fuel cost forms 40-50% of total cost • Fuel taxes • Suggestions • Export parity pricing for liquid fuels • Cost of coal to be in line with international prices GMR Group