CERC packages for Adani, Tata signal hope for others

Written by fe Bureau | New Delhi | Updated: Feb 23 2014, 11:08am hrs
In two separate orders on Saturday, the Central Electricity Regulatory Commission (CERC) has spelt out how Tata Power and Adani power would be compensated for the deleterious effect of the unforeseen, post-September 2011 hike in Indonesian coal price on the viability of their Mundra (Gujarat) power stations.

The regulator, which had approved bailout packages for the two stations in April 2013 in the form of a temporary, actual cost-escalation-based compensatory tariffs, has now awarded compensations of 52 paise/unit for Tata Power and 71 paise/unit for Adani Power for 2013-14. Additionally, while Adani Power would get lumpsum compensation of R420 crore and R409 crore, respectively, from Gujarat and Haryana discoms for the loss on account of fuel cost increase for the period up to March-end 2013, Tata Powers consumers (discoms) in five states Maharashtra, Rajasthan, Haryana and Punjab, besides host state of Gujarat amongst them will have to pay up R326 crore for the the companys similar losses in 2012-13 in 36 equal monthly instalments.

The regulator has also recommended formula for calculating quantum of compensatory tariff for the period beyond March 2013

The CERC order has ramifications for the power sector in the country. Analysts say it could herald a trend of other producers also asking for similar regulatory succuor to address cost escalations not envisaged at the time of the finalisation of the power purchase agreements (PPAs). For example, Reliance Power, whose Sasan UMPP has seen 20% increase in project costs due to the weakening of the rupee, has made a plea to the regulator for approval to capitalise additional expenditure, even as there is no such provision in the PPA.

These PPAs, it may be noted, were signed after the companies won the contracts through competitive bidding, wherein they quoted non-escalable fuel charges.

Significantly, the regulator sought to apportion the burden of the fuel cost hike in the Adani Power and Tata Power cases amongst all stakeholders the buyers (SEBs/discoms), banks and the companies themselves. From now on, the compensatory tariff will be computed by taking the difference between the actual fuel costs for a particular year and that quoted by the developer during the bidding.

As for the two power producers, the actual profits accruing to them from coal mining operations in Indonesia (they have stakes in these ventures) would be used to reduce the hikes in tariffs. In other words, merchant sale of electricity beyond 80% normative capacity availability will be deducted to arrive at compensatory tariff. Also, the CERC cut the return on equity for the two companies by 1 percentage point each.

Final settlement will be done on the basis of actual fuel costs paid by the developer. There will be a regulatory review after three years.

Of course, the discoms,, which may find it difficult to pass the additional burden on them through tariff hikes, have the option of approaching the appellate authority for a review of the CERC order. Except Punjab, all power procurers have give in-principle approval for abiding by the CERCs award. However, a final view will be taken by respective state cabinets.

The regulator has also held that lenders lower interest on loan extended

to these projects to share hardship with developers and power procurers

and made a plea to the RBI for leniency.

Indian power companies, including Tata Power and Adani Power, have taken equities in Indonesian coal mines to cover their fuel risks in power plants bagged by them through competitive bidding

here. However, Indonesian switched over to international indices-based

coal pricing in September 2011, throwing haywire these companies fuel

cost calculations.

But in April last year, the CERC upheld Tata Powers and Adani Powers pleas that they be

allowed to pass on increase in Indonesian coal price

to power procurers. It

directed setting up a committee to evolve a mechanism to calculate compensatory tariff.

Following that, a panel was formed under Deepak Parekh, former HDFC bank chairman, and comprising state principal energy secretaries and chiefs of power procuring discoms. The committee submitted its report in August.

The CERCs interventions in the two projects have encouraged other investors to approach it for relief in similar cases.

The CERC order said: As recommended by the Committee, the generator and procurers may jointly approach RBI, ministry of finance and ministry of power for possible assistance to the power producers in getting relief on account of interest rates and restructuring of loan.

The Commission requests RBI to favourably consider the request of the parties to make the project viable if such an application is made.

Tata Power arm CGPL, in its petition, had projected a loss of R1,873 crore per annum and R47, 500 crore over a period of 25 years on account of higher fuel costs.