States may challenge CERC’s bailout package

Electricity bills are set to increase ahead of elections as Tata Power, Adani Power have been permitted to increase power tariffs

Utpal Bhaskar
Updated24 Feb 2014
The CERC has ruled that Tata Power, Adani Power be allowed to temporarily hike tariffs to compensate additional fuel costs they are incurring. Photo: Hindustan Times<br /><br />
The CERC has ruled that Tata Power, Adani Power be allowed to temporarily hike tariffs to compensate additional fuel costs they are incurring. Photo: Hindustan Times

New Delhi: The impending general election may force state governments to challenge India’s apex power sector regulator CERC’s orders of a bailout package to Tata Power Co. Ltd and Adani Power Ltd for the electricity generated from their imported coal-based plants at Mundra in Gujarat, according to several officials belonging to different state governments.

With the consumer’s electricity bill set to increase, the states are firming up their strategy ahead of the national election that is due by May.

The Central Electricity Regulatory Commission (CERC), in separate orders dated Friday, upheld its earlier view and ruled that these generation utilities will be allowed to temporarily increase tariffs to compensate for the additional fuel costs they are incurring. This is on account of coal imports becoming expensive when the Indonesian government in 2012 started levying higher royalty and income tax, affecting the financial viability of the projects. The position will be reviewed after three years.

In addition, CERC also ordered a lump sum payment of 829.75 crore and 329.45 crore to Adani Power and Tata Power’s Coastal Gujarat Power Ltd (CGPL), respectively.

State utilities may approach the Appellate Tribunal for Electricity (ATE) against the order.

“The tariffs will go up. We had raised a lot of objections. We can very much go for an appeal. This will also have political ramifications,” said a Maharashtra government official requesting anonymity.

This comes in the backdrop of power tariffs becoming a poll plank after the Aam Aadmi Party (AAP) formed a government in Delhi on the back of a promise to lower electricity tariffs. Before remitting office, the AAP government slashed electricity tariff by half for households consuming up to 400 units of power per month. Other states such as the Congress party-led Maharashtra government followed suit.

While Saurabh Patel, Bharatiya Janata Party-ruled Gujarat’s energy minister, said that the order will be studied and declined to comment immediately, a Haryana government official who also didn’t want to be identified said his government may also appeal the order. “We have to see what the other states are doing and evolve a strategy. With the general election around, there will be political compulsions to challenge this order,” added the Haryana government official.

Power sector analysts said electoral opportunism will lead to the use of electricity tariffs as a poll issue.

A New Delhi-based power sector analyst who declined to be identified said, “The ghost of electricity tariffs are back. Tariffs as an election issue had gone on the backburner, but we are seeing its revival in the build-up to the general election. The problem is that no political party has a long-term view on the issue.”

In the case of CGPL, the electricity tariffs will increase by 52 paise per unit for the current fiscal year across states such as Gujarat, Maharashtra, Haryana, Punjab and Rajasthan, which are the procurers of electricity from this project. CGPL had signed agreements to sell electricity generated to these states at 2.26 per unit.

For the 4,620 megawatts (MW) Adani project, the customers in Haryana and Gujarat will have to pay an additional 43 paise per unit and 71 paise per unit, respectively, for the current fiscal. Adani Power has entered into two power-purchase agreements (PPAs) 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 supply of 1,424MW.

“This order will facilitate in sustaining operations at Mundra and enable us to continue honouring PPA commitments. The order shall mitigate the hardships to some extent on account of the impact of enactment of the Indonesian regulation and the shortage of domestic coal supplies from Coal India Ltd,” said an Adani spokesperson in an emailed statement.

Analysts welcomed the CERC orders.

“Other than minor changes in auxiliary consumption level and transport loss, CERC has fully accepted the Parekh Committee report. Implementation of the order, however, will still depend upon how the affected distribution utilities use their recourse to challenge this order in the ATE and then the Supreme Court,” said a Mumbai-based power sector analyst, requesting anonymity.

“When implemented, this order will give a huge relief to the independent power producers involved and a sentiment boost to the beleaguered power sector,” the analyst said.

Former power secretary P. Umashankar said, “The distribution tariff is subject to political views. What so far one has seen is that the end price is controlled without attempting to bring down the contributing factors.”

While a Tata Power spokesperson declined to comment, the Adani Power spokesperson declined to respond about the possibility of the states challenging the CERC order.

Tata Power and Adani Power had approached CERC to consider an increase in power tariffs after customers didn’t want to pay higher charges.

The order is significant as it opens the door to compensation for the other power projects that have run into similar problems due to a seemingly unexpected turn of circumstances, especially with respect to fuel costs. Work has also been halted at Reliance Power Ltd’s Krishnapatnam imported coal-based project in Andhra Pradesh because of the unexpected rise in fuel price.

“The commission realizes that the power sector is facing multi-pronged challenges, primary being fuel availability. The commission also realizes that the banking sector is also linked heavily by way of loan disbursements with the sector. Thus, it needs to be ensured that the sector remains operational. The commission is also aware that the procurers will be subjected to a situation of going in for fresh bids in the event of complete bankruptcy of the generator, primarily due to the reasons of increased imported coal cost,” CERC wrote in its order on Adani Power.

This order also comes in the backdrop of the Union government working on a so-called peaking power policy which may provide for up to five-year contracts and a pass-through of fuel price increases to help these projects become economically viable.

The regulator, in its individual orders for awarding compensatory tariff to Tata Power’s CGPL and Adani Power, also laid out the parameters to be used for the calculation of compensatory tariff on a monthly basis for the current financial year (2013-14). This dispensation remains till the hardship on account of the Indonesian regulations persists. The tariffs will be audited at the end of every fiscal year.

Also, CERC said that while working out the compensatory tariff, issues such as the profits earned by the utilities’ coal mines and revenue share on account of electricity sales over and above the commitment under PPAs be considered.

In addition, the regulator also ordered CGPL and Adani Power to share the compensatory tariff by forgoing its return on equity (RoE). In the case of CGPL, the regulator has ordered the utility to take a “haircut” of 1% of its RoE to be adjusted in the compensatory tariff. For Adani Power, it is 1% of its RoE for the electricity tariff for Gujarat and 0.25% in case of Haryana.

“The net compensatory tariff in the case of CGPL will be around 35 paise per unit. While the reduction in RoE will reduce the tariff by 2 paise, a further reduction of 14 paise is expected due to merchant sales assuming that the project is operating at 90% capacity and the merchant sales are in the range of 4 per unit,” said the Mumbai-based analyst cited above.

In addition, CERC, in its order on CGPL, also provided for 329.45 crore “lump sum compensation” from the electricity procurers for 2012-13 financial year. Further, CERC also provided for the current fiscal and stated, “The arrears in this respect from 1.4.2013 till 28.2.2014, in accordance with this order, shall be recovered from the procurers in equal monthly instalments over a period of not less than 12 months from the date of this order.”

A similar dispensation has been provided for Adani Power, with Gujarat and Haryana governments to pay 420.24 crore and 409.51 crore, respectively, till the last fiscal.

A Tata Power spokesperson, in an emailed statement on Saturday, said, “This will go towards resolving a major impasse affecting imported coal-based power projects in the country that got impacted due to uncontrollable extraneous factors.”

The power sector regulator had last year offered to allow Tata Power and Adani Power a variable compensatory tariff till the fuel situation stabilized, as well as a bailout package. It had appointed the Deepak Parekh Committee to suggest revised tariff for both the companies. The committee recommended an increase in tariff.

CERC also suggested that CGPL and the electricity procurers approach the concerned authorities for a reduction in duties and taxes. Similarly, it also recommended them to approach lenders “to obtain reduction in interest rates, extending moratorium on principal repayment for a period of two-three years and possible extension of loan repayment tenor”. Such relief, if provided, would help in the reduction of compensatory tariff.

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