In April, 2013, Central Electricity Regulatory Commission (CERC) in its interim order, allowed a ‘compensatory tariff’[CT] of Rs 0.524 per unit to Tata Power Ltd (TPL) 4000 MW ultra mega power project (UMPP) based on imported coal in Mundra, [Gujarat] for all its buyers. Likewise, for Adani Power, UMPP [4620 MW] it allowed CT of Rs 0.851 per unit and Rs 0.364 per unit for supplies to utilities in Gujarat and Haryana respectively.
The CT was meant to neutralize increase in price of imported coal consequent to decision of Indonesian Government in September 2011, imposing a minimum ‘benchmark’ price below which coal cannot be exported. Not quite satisfied with the quantum of relief given by CERC, the Adani/Tata petitioned the Appellate Tribunal for Electricity [APTEL]. That was March, 2014.
Tata and Adani had bagged projects under tariff-based competitive bidding [TBCB] to supply power at fixed tariff of Rs 2.26 per unit and Rs 2.35/ Rs 2.94 per unit for Gujarat/ Haryana respectively – all through project’s operational life. In its order delivered on April 7, 2016, APTEL has set aside CERC order saying “it had no powers to modify tariff for developers that had entered in to power purchase agreements [PPAs] through TBCB route.”
Concurrently, it also directed CERC to compute relief to the two companies under “force majeure” clause. In doing so, the Tribunal considered intervention by the Indonesian regulation as well as non-availability/short supply of domestic coal in case of Adani to constitute “force majeure” event in terms of PPA whereas for Tata, increase in Indonesian coal price itself constitute “force majeure” .
Historically, when power projects were assigned on MoU basis, PPAs included a clause allowing ‘pass-thru’ of increase in fuel cost. This led to an automatic hike in tariff whenever, fuel prices increased. The new concept of assigning projects under ‘TBCB’ route under which a promoter who bids lowest ‘fixed tariff’ for supply in the long-term was intended to shield state electricity boards [SEBs]/power distribution companies [PDCs] against such hikes.
The order of CERC would have demolished this shield besides violating sanctity of contract under PPA. APTEL has set aside the order – rightly so – but that is hardly any consolation to power consumers as by invoking “force majeure”, it has allowed hike to generators which may work out to be even higher than recommended by CERC. What is given from left hand is taken away from the right!
Whether it is the regulator or the judicial authority, both are hell bent on rewarding power producers and at the same time inflicting injury on the consumer, only the modus operandi chosen may be different. APTEL’s benevolence towards Adani/Tata requires a close look. It perceives Indonesia’s regulatory intervention as an event beyond control of promoter. This is flawed.
When, you procure fuel from a foreign source, there is always a risk of change in price due to a variety of factors including regulatory intervention. This is an ‘endogenous’ factor that the promoter necessarily takes in to consideration while assessing viability of project. To guard against such contingencies, Tata Power Limited [TPL] even held equity 25-30% in 3 mines in Indonesia.
Such an arrangement meant that even when price of coal increased leading to increase in generation cost, profit accruing to TPL as owner of mine also went up thereby enabling it to offset the impact. In this backdrop, it would be illogical and unfair for company to seek relief from CERC for its alleged loss. And, it is untenable for APTEL to grant relief by treating the development as an ‘exogenous’ and ‘unanticipated’ event. There is another compelling reason as to why the regulators/judicial authorities should refrain from considering relief.
The investigations by Finance Ministry and Directorate of Revenue Intelligence (DRI) have revealed over-invoicing of coal imports by 40 companies — both in the public and private sector — to the tune of ₹35,000 crore during the past two-three years. During this period, the average price of Indonesian coal with a gross calorific value of 3,800-4,200 kCal/kg ranged between $38 and $49 a tonne on free-on-board (FOB) basis, according to various international indices. On CIF [cost insurance and freight] basis, this should be $55-60/tonne. However, actual payments were almost double this price. Since, coal costs are pass thru under PPAs, it was hapless consumers who ended up paying for siphoning of funds by generators.
The projects of Tata/Adani which were awarded under TBCB route were expected to be free from impact of any increase fuel price [including from actions of foreign regulators]. But, it would look abhorrent if the tariff also increases due to sheer act of manipulating coal price. Unfortunately, APTEL/CERC whose prime responsibility is to protect interest of consumers are only making them more susceptible.
Ironically, the government appears to be going a step further by dispensing with the TBCB policy altogether. For awarding projects henceforth, it intends to invite bids only for ‘fixed’ component even as fuel cost will be pass-thru; back to square one! This is a dangerous trend. It will not only lead to steep increase in tariff from all UMPPs – in operation and under commissioning – but also ‘pre-empt’ all chances of reining in tariff in future.
It is baffling that while on one hand, the government is struggling to bring bleeding SEBs/PDCs back to health [early this year, it sanctioned a financial restructuring package [FRP] to clear a mammoth Rs 400,000 crores debt involving a lot of sacrifices by state governments and banks] on the other, this task is made more and more difficult by allowing unabated increase in cost to generators.
Modi – government exudes confidence that consequent to implementation of FRP and a couple of other complementing measures, such as improving power generation efficiency and reducing theft, the SEBs/PDCs would be nursed back to health in the next 3-4 years. This will remain a distant dream if it does not address head on (i) continued abysmally low tariff on supplies to farmers and households and (ii) treating power generators with kid gloves.