Home / Companies / News /  Adani Power lifeline may set precedent

New Delhi: In an unprecedented move, India’s apex power sector regulator offered a bailout package to Adani Power Ltd in a late Tuesday order to offset losses on account of the unexpected increase in the prices of imported coal and the unavailability of domestic coal for the company’s 4,620 megawatts (MW) thermal power project at Mundra in Gujarat.

The Central Electricity Regulatory Commission (CERC) ruled that the company will be allowed to temporarily increase tariffs to compensate for the additional fuel costs.

It justified this action on the ground that the increase in fuel prices had made it unviable for Adani Power to supply electricity to consumers at the price to which it had committed itself while winning the competitive bid in 2007 for supplying electricity to Gujarat Urja Vikas Nigam Ltd (GUVNL) and in 2008 for supply to Haryana’s Uttar Haryana Bijli Vitran Nigam Ltd (UHBVNL) and Dakshin Haryana Bijli Vitran Nigam Ltd (DHBVNL) utilities.

The order, a majority verdict since one of the four members dissented, is significant as it opens the door to compensation for other power projects that have run into similar problems due to a seemingly unexpected turn of circumstances, especially with respect to fuel costs.

The dissenting member opined that the order set a bad precedent and compromised consumer interests by preparing the ground for an effective increase in tariffs as a means of compensating developers for unexpected and unplanned cost increases.

Fuel availability has become a cause for concern, largely because domestic coal mining has been unable to keep pace with the growing demand for the fuel in the country. Coal demand in India is expected to grow from 649 million tonnes per annum (mtpa) now to 730 mtpa in 2016-17, making the country heavily dependent on imported coal, given the projected local availability is only 550 mtpa.

“The order is progressive and might go a long way to resolve the imported coal issue. The expert committee to be formed should look into equity returns and sale of merchant power to offset the compensatory tariff," said Sambitosh Mohapatra, executive director at audit and consulting firm PwC India.

However, others were critical of the order.

“Taking advantage of this order, any developer who is under stress can seek revisiting of the power purchase agreement," said Debasish Mishra, senior director at Deloitte Touche Tohmatsu India Pvt. Ltd, an audit and consultancy firm.

Adani Power had entered into two power purchase agreements of 1,000MW each with the Gujarat government at 2.35 per unit, and 2.89 per unit for its 4,620MW plant in Mundra. It entered into a similar accord with the Haryana government at 2.94 per unit for 1,424MW.

The company approached CERC to consider increases in the power tariff after customers in Haryana and Gujarat declined to pay higher rates for the electricity generated from its imported coal-based plant in Gujarat.

CERC called for a variable “compensatory tariff" akin to a compensation package to be offered to Gautam Adani-promoted Adani Power till the fuel situation stabilized. The judgement will also have a favourable bearing on other imported coal-based projects planned in the country such as those of Tata Power Co. Ltd and Reliance Power Ltd.

Companies such as Adani Power, Tata Power and Reliance Power had acquired coal mines in Indonesia to feed their plants in India. Coal imports, however, became expensive for the firms when the Indonesian government last year started levying higher royalty and income tax, affecting the financial viability of the power plants operated by these companies.

“In the present case, the escalation in price of imported coal on account of Indonesian regulation and non-availability of adequate fuel linkage from Coal India Ltd for the project of the petitioner is a temporary phenomenon and is likely to be stabilized after some time," CERC said in its order passed by chairman Pramod Deo and members M. Deena Dayalan and V.S. Verma.

S. Jayaraman, member, CERC, disagreed with the order that will provide significant relief to Adani Power.

“The decision in the present case will be the precedent to be followed in future. The exercise of regulatory power in such cases will have a cascading effect. In case there is again some development of similar nature, will the commission interfere again at the instance of the project developer? Will such an exercise of power not jeopardize the consumers’ interest?" Jayaraman wrote in his separate order.

A top power ministry official, requesting anonymity, said, “The utilities have the right to file a petition with the electricity commissions wherein every case is dealt on its merits."

Tata Power has also approached CERC to consider an increase in its power tariffs after customers declined to pay higher rates for the electricity generated from its imported coal-based Mundra plant in Gujarat. Tata Power’s special purpose vehicle, Coastal Gujarat Power Ltd, signed agreements to sell electricity generated from its Mundra plant to Gujarat, Maharashtra, Haryana, Punjab and Rajasthan at 2.26 per unit.

Similarly, work has also been halted at Reliance Power’s Krishnapatnam imported coal-based project in Andhra Pradesh because of the unexpected rise in fuel price.

“When level-playing field having been provided between the project developer and the distribution licensees and opportunity having been provided to cover their respective commercial risks, it is not the mandate of the commission to ensure that the project developer earns profit in every situation, irrespective of business risks assumed by the developer," Jayaraman argued in his order.

However, the utilities may approach the Appellate Tribunal for Electricity against the order.

“There is no change in law as per the CERC order and Adani Power will have to continue to supply as per the power purchase agreement. The order has suggested a practical solution for a practical problem. The regulator wants the power developers and procurers to amicably reach a solution," said a GUVNL official requesting anonymity.

He added that there were some grey areas in the order. “In competitive bidding, the burden of fuel supply was so far on the developer and not the procurer. As per this order, the coal price hike burden will have to be shared by the procurer. There is an option of approaching the Appellate Tribunal for Electricity and the government is looking into this," the GUVNL official said.

While Deo and Jayaraman declined to comment, Devender Singh, chairman of UHBVNL and DHBVNL, said, “After going through the order, we will take a view."

A section of consumers sounded resigned.

“I have been regularly tracking our electricity bill and the tariff rates are going up year after year from past many years. How much can one complain? It is of no use. So people like us will have to concentrate on earning more," said Ami Udeshi, 34, a home-maker who lives in the Thaltej area in Ahmedabad.

While Saurabh Patel, Gujarat’s energy minister, declined comment as he hadn’t read the order, D.J. Pandian, principal secretary, energy and petrochemicals, said, “We have gone through the report and are yet to arrive at any decision on the future course of action. Maybe we will decide on it in a day or so."

“We direct the petitioner and the respondents and the respective state governments to constitute a committee within one week from the date of this order," CERC said in the order posted on its website. “The Committee shall submit its report to the Commission by 30 April 2013 for consideration and for further directions."

Jayaraman said in his dissentient note: “The petitioner may have resorted to aggressive and predatory bidding to win the bids by edging out the other competitors for which the petitioner is accountable and the consumers of Gujarat and Haryana should not be made to pay for the miscalculation/mistake of the petitioner, if any, and to ensure profitability of the petitioner irrespective of assumption of commercial risks. As the price of imported coal has considerably come down, the petitioner even does not have a case on the basis of unwarranted and unprecedented rise in Indonesian coal price."

Power stocks rallied through the day. On Wednesday, Adani Power rose 8.79% to 47.65 on BSE. Adani Enterprises Ltd rose 2.89% to 219, while Tata Power and Reliance Power rose by 0.73% and 0.69%, respectively, to 96.05 and 66.10. The benchmark Sensex fell 1.26% to 18,801.64 points at the close.

Adani Power said in a statement: “The order itself is a landmark order recognizing and balancing the need for a solution for all the stakeholders. The independent committee of stakeholders plus a banker and a financial analyst will propose a solution in a time bound and transparent manner."

While a Reliance Power spokesperson didn’t respond to Mint’s queries, a Tata Power spokesperson said in an emailed reply: “We acknowledge that this order opens up opportunity for the sector to use its imported coal-based assets effectively, competitively and contribute to national economy. It unlocks value in several of the under-utilized or abandoned proposals, which will now contribute to the burgeoning power demand."

Adani Power is also fighting a case in the Supreme Court where it has challenged a Gujarat state electricity regulator’s decision that did not allow it to scrap the 2.35 per unit agreement with the Gujarat state utility. Adani had sent a notice to the utility seeking termination of the agreement as it could not secure fuel from a local source and had to import it.

Jayaraman also wrote that with the Gautam Adani-led conglomerate holding 74% of shares in the Indonesian coal company, “the Adani Group as a whole may be the ultimate beneficiary of the Indonesian regulations".


Utpal Bhaskar

"Utpal Bhaskar leads Mint's policy and economy coverage. He is part of Mint’s launch team, which he joined as a staff writer in 2006. Widely cited by authors and think-tanks, he has reported extensively on the intersection of India’s policy, polity and corporate space.
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