Photo: Priyanka Parashar/Mint
Photo: Priyanka Parashar/Mint

CERC allows Tata Power, Adani Power to pass through high cost

CERC allows Tata Power, Adani to pass through the losses suffered by them due to procuring high price coal from Indonesia to run their power plant

New Delhi/Mumbai: The Central Electricity Regulatory Commission (CERC) on Wednesday ruled that Tata Power Co. Ltd and Adani Power Ltd were entitled to charge their customers more to recover the higher costs stemming from an increase in the price of imported coal.

In its ruling, the regulator said the power producers were entitled to invoke ‘force majeure’ (unforeseeable circumstances that prevents a contract from being fulfilled) to seek a higher price.

A change in Indonesian regulations pushed up the cost of coal imported by Tata Power and Adani Power from that country to fuel their electricity plants, forcing the companies to seek a higher price. The CERC held that in view of the change in Indonesian regulations, the terms at which Tata Power and Adani Power quoted their original tariffs for power supply had lost their relevance.

It directed power procurers—Haryana utilities Uttar Haryana Bijli Vitran Nigam Ltd and Dakshin Haryana Bijli Vitran Nigam Ltd and Gujarat Urja Vikas Nigam Ltd—to pay the difference in the coal prices.

The implementation of the order is subject to an appeal pending in the Supreme Court.

“This decision of the CERC is an important step in resolving the major impasse affecting imported coal-based power projects in the country that got impacted due to extraneous factors well beyond the control of developers," Tata Power said in a statement.

“Coastal Gujarat Power Ltd (CGPL), has been delivering the full potential of Mundra across the five beneficiary states albeit with tremendous fiscal pain...We look forward to Honourable Supreme Court’s permission to implement the order. We are studying the order and the detailed financial impact shall be worked out after analysis of the order," the statement said.

The Appellate Tribunal for Electricity (Aptel), in April, decided that an unforeseen increase in the cost of coal would be a force majeure event under their power purchase agreements (PPAs) and asked the CERC to grant relief in accordance with their PPAs.

Tata Power said the latest CERC order would benefit consumers, who will be supplied reliable and affordable power from the Mundra power plant in Gujarat.

“Even after considering the indicative compensatory tariff the cost would be much lower and competitive than the average purchase price of all five states, and is substantially lower than the current market," the company said.

The formula in Wednesday’s order speaks of compensating the petitioners the differential of the actual fuel cost minus the cost at which it was originally contracted.

“The formula is very clear but certain variables are unknown to us... The compensatory tariffs have already been built in by the Street in the both Tata Power and Adani’s (earnings) estimates. So the news is more sentiment-positive," said Murtaza Arsiwalla, an analyst with Kotak Institutional Equities.

On Wednesday, Tata Power’s shares fell 1.13% to Rs74.40 and Adani Power’s shares declined 1.09% to Rs31.80 on BSE. The benchmark Sensex fell 0.59% to 26,236.87 points.

“While the regulators have allowed the pass-through, they have not mentioned any number (amount), which will be a mutually decided number as and when it comes. They have given a formula and it needs to be seen how they calculate within the formula on the per unit impact," said a broker analyst on condition of anonymity.

Tata Power acquired a 30% stake in two Indonesian thermal coal companies in 2007 about $1.1 billion to control costs of fuel for its CGPL Mundra Ultra Mega Power Project (UMPP) in Gujarat. Following a change in Indonesian law, the company decided to sell these assets in order to bring down debt as CGPL continued to face challenges and the company sought to address its cash flow concerns.

Tata Power, which earlier this month cut the sale consideration for these assets, is yet to close a transaction with Bakrie Group.

The CERC in its Wednesday order did not grant the two power producers carrying costs or additional expenses incurred owing to the increased cost of production. “The impact of force majeure…will be from the date of occurrence of the force majeure events and its compensation billing will be receivable effective respective months, the reliefs will be crystallised through this order. Therefore, the petitioner shall be not be entitled for carrying cost for the past period," the regulator said.