The Central Electricity Regulatory Commission’s (CERC) order allowing Tata Power and Adani Power to raise tariffs and receive compensation to make up for losses incurred at their Mundra projects will open a Pandora’s box, feels S Jayaraman, former member of the commission.
In its order on February 21, CERC, the country’s apex power sector regulator, had set aside legally tenable business agreements — achieved through global tenders — between the buyer (State distribution companies) and the seller (power generators), to grant the latter a higher tariff.
The commission said unforeseen developments made it “impossible” for the companies to fulfil their supply obligations and took recourse of the broad powers vested with the regulator to allow recovery of part of the cost push.
The decision has paved the way for around 48,000 MW worth of generation capacities, which inked long-term deals through fixed tariff-based bidding, to seek a price revision.
A total of 19 such petitions are pending with the regulator. The uniqueness of the case lies in the very fact that there is no dispute on the legal tenability of the contracts.
Sanctity of contract violated The producers had the option to quote a cost-plus based tariff. But they decided to shoulder every risk of the cost-push to quote a low levelised tariff for 25-years.
Levelised tariff refers to the average fixed and variable tariff over the entire term of the power purchase agreement adjusted for inflation.
Both Tata and Adani proposed to source part of the coal requirement from their mines in Indonesia.
They now face a problem due to changes in the pricing methodology for Indonesian coal.
It did not impact their earnings from mining operations, but made imports to India costlier.
Jayaraman was the only member to oppose a previous CERC order, in April 2013, to reopen Adani Power’s contracts. Considering that the bid document was prepared in accordance with Government guidelines, he advocated maintaining the sanctity of the contracts.
But the Appellate for Tribunal Electricity held that power being a regulated sector the CERC is eligible to use plenary provisions.
Accordingly, the CERC now issued a compensation formula that asks all sides to share part of the unforeseen cost push.
While consumers will pay a compensatory tariff, banks are asked to charge a lower interest and power producers are asked to share a part of their earnings from group mining activity to calibrate the cost push. They are also asked to share 40 per cent revenue from merchant sales with the utilities. Producers are offered one percentage point lower return on equity.
More litigation? That the CERC order made a mockery of tendering norms is admitted by the producers.
But they argue private companies are producing the cheapest power in the country and, it would be a loss to the discoms to deny this opportunity and initiate a legal battle in the court of law.
But that may be an oversimplification of the scenario.
Jayaraman says during the hearings, discoms strongly held against proposals for tariff hike citing inability to recover the same from final consumers. Considering the weak financials of discoms, the concern may not be unjustified. In the end, however, the issue was treated from the point of view of rescuing the producers.
The indications are that the cascading impact of this judgement may soon pave the way for wider representations of discoms before various legal forums.
There are some other problems, too. The levelised tariff-based bidding did not fail merely due to any Indonesian regulation. Nor do all those who participated in such bidding have captive mines in Indonesia.
The sharp decline of the rupee against the US dollar making imports at least 40 per cent costlier. Besides, non-availability of adequate domestic coal, increase in coal prices by Coal India and high inflation all made levelised tariff an unviable proposition.
It was surprising that how the best brains in the business and administration could overlook such a gaping hole in the policy.
No one questioned how power could be supplied at ₹2.35 a kilowatt hour throughout the life of the plant. None pointed out that even a Coal India price hike could upset the applecart.
It will now be interesting to watch on how the nation regularises its mistakes.