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Management | Conflicting legal provisions leave power generating firms befuddled

Management | Conflicting legal provisions leave power generating firms befuddled
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First Published: Mon, Apr 28 2008. 12 15 AM IST
Updated: Mon, Apr 28 2008. 12 15 AM IST
Has the government added another hurdle in the generation of electricity?
Setting up a power generating unit in India is an elaborate and time-consuming process, despite the government’s emphasis on the infrastructure sector and its development. Approvals and consents are required from multiple Union and state ministries and regulatory authorities.
A recent study by the World Bank has revealed that the time taken for procuring approvals for an infrastructure project in India, including electricity generating units, can vary from 18 months to four-five years.
An entity proposing to set up a generating plant has to seek approvals, among others, from the ministry of environment and forests (environmental impact assessment clearance); the ministry of coal, for the allocation of coal in the case of a thermal power project; from the Central Electricity Authority, in the case of a hydropower project; the appropriate electricity regulatory commission (ERC); the director general of civil aviation; the state water department; open access approval, in the case of captive power production or direct purchase from a generator; and the state land department for the allocation of land.
The introduction of the Electricity Act, 2003, ushered in a number of changes, and promised new opportunities to investors/stakeholders wanting to enter the generation business. However, it does not seem to have helped significantly in reducing the time involved in procuring the required approvals.
Further, the promise and hope provided by the Act has been diluted with the government adding a new roadblock for generating firms in the form of para 5.1 of the Tariff Policy, 2006—read with its clarification dated 28 March 2006—which now requires a distribution licensee to procure power only by inviting bids as per competitive bidding guidelines set by the government, and not directly from a generating firm pursuant to a memorandum of understanding (MoU) and/or a power purchase agreement (PPA) with a generating firm.
The Act, as it was introduced, gave the option to an electricity generating entity to sell power to (a) a distribution licensee (long term and/or short term), (b) a consumer situated anywhere in the country, but having open access approval from the concerned bodies for wheeling of power purchased, and (c) a trading licensee.
The market for electricity generating companies, therefore, expanded from limited buyers (state electricity boards) to a booming multiple-buyer market. If a company entered into a PPA with a distribution licensee after executing an MoU with a state government, it would have to submit the PPA under section 62 of the Act for determination of tariff, which, in such a case, is determined after inviting objections from the public/stakeholders.
Another option was the procurement of power by the distribution licensee through competitive bidding. Since the tariff, in this case, was to be determined fairly under competitive bidding, the Act stipulates a special section (section 63) based on which the appropriate ERC was mandated to adopt the tariff so reached and not go into the determination of tariff.
However, now the policy states that all future requirement of power should be procured competitively by distribution licensees, except under certain defined situations. This created a flutter among the licensees and stakeholders, who approached the Central Electricity Regulatory Commission (CERC).
CERC requested the ministry of power for clarification as the policy curtailed the route available to investors/stakeholders under section 62 of the Act. The Centre gave very limited relief by saying certain select projects and procurement agreements fell outside the scope of the policy’s clause 5.1.
Hence, pursuant to this policy, a generating station cannot be set up merely on the basis of an MoU with a state government and a privately negotiated PPA with a distribution licensee. A PPA entered in the given circumstances will not be valid as it cannot be submitted for determination of tariff and—since this will not be procurement of power by the distribution licensee through competitive bidding—it will be treated as void.
The generating company now has to wait for a distribution licensee (operating anywhere in India) to issue a request for a proposal for procurement through competitive bidding before it can actually procure power for further sale in its area of distribution. The generating company may thus be compelled to sell its power to a trading licensee as this is the only option available for a firm offtake under a long-term PPA.
In such a scenario, the setting up of a generating station will be pursuant to an MoU with a state government, but there will be no PPA with a distribution licensee, which will not attract the restriction imposed by the policy.
This is hardly a respite as, even then, the trading licensee cannot enter into long-term sales to a distribution licensee as the procurement of power by the distribution licensee continues to fall within the ambit of the policy, and the licensee is bound to procure power only by competitive bidding.
A trading licensee and the generating company may, however, have short-term sales to distribution licensees or to a consumer who has obtained open access from the concerned licensee(s), in accordance with the Union government communication.
But again, this may not be an attractive option. Such sales are usually of small quantities and carry with them the cumbersome process of obtaining “open access” from the concerned licensees.
While the provisions of a legislation legally override policies/government clarifications, the on-ground reality is that it is the policy, and not the Act, that is being followed by ERCs. This is apparent from an order passed by the Orissa ERC which required private power developers to file relevant evidential documents showing the appraisal of their projects by the financial institutions on or before 6 January 2006 based on the procurement of power by any utility so as to examine if the PPA for the proposed project would be admissible.
This direction was given by the ERC to comply with the policy and its clarification. The regulator taking such a stand, in spite of clear rights and powers vested in it by section 62 of the Act, sends out conflicting and unclear signals to the industry and stakeholders.
The given situation may or may not be intentional, but there is an apparent conflict between the policy and the Act and it sure has created a legal web which is yet another territory investors/stakeholders have to conquer, and simultaneously convince the lenders, before it sets up a generating station and supplies badly needed electricity to the booming economy and growing population of India.
Send your comments to lawfullyyours@livemint.com
This column is contributed by Shashwat Kumar of AZB & Partners, Advocates and Solicitors.
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First Published: Mon, Apr 28 2008. 12 15 AM IST