Column: Striking a balance

Updated: Mar 7 2014, 08:20am hrs
Two regulatory orders in February have had different effects on private sector power generators and the state-owned power utilities. The markets have responded positively to Tata Power and Adani Group, in the wake of the Central Electricity Regulatory Commissions (CERC) orders allowing payment of compensatory tariff to two power projects belonging to the two firms, above the rates determined through competitive bidding. But the orders will result in state-owned distribution utilities in Gujarat, Maharashtra, Haryana, Rajasthan and Punjab paying an extra 52 paise for every unit generated from Tatas plant in Mundra, as against levelised tariffs of R2.26 offered by the promoter in the original power purchase agreements. For Adanis plant at the same location, the extra payment for Haryana will be 43 paise and 71 paise for Gujarat as against levelised tariffs of R1.96 and R1.38 respectively. The rise, being a pass-through under the provisions of the Electricity Act 2003, will be recovered from the consumers of these utilities. How will this square with the recent trend of some state governments announcing reduction of tariffs We plan to examine it in two parts: this part will focus on the central commissions reasons for granting this hike and concluding one will examine what is happening in the states.

The additional tariff effectively compensates the two private developers for an unforeseen escalation in imported coal costs as a result of regulations announced by the Indonesian government. The central commissions solution attempts to strike a balance in restoring the financial viability of the power plants while keeping the hit to the consumers to the minimum, with a series of safeguards built into the compensatory tariff order.

The central commission saw some merit in the generators plea that promulgation of the Indonesian regulation has led to abnormal increase in the cost of generation of electricity, making the project totally unviable. It observed that unless the concerns of the generators are addressed, the possibility of them defaulting in discharging their obligations under the power purchase agreement (PPA) due to the perceived financial burden cannot be totally ruled out and that will affect the interest of the consumers. In that event, the state utilities will be required to invite fresh bids to meet their requirement of power and till the selected project or projects are commissioned, the consumers will be deprived of power. Moreover, the tariff discovered recently for new projects are in the range of R3.50 to R7 per unit which the consumers of Mundra projects will be required to pay. Thus at the macro level, it will be a serious setback for the electricity sector and will adversely affect the investment in the sector and at the micro level, it will affect the continued and reliable supply of power to the consumers. In view of this commission deemed it necessary to intervene in the matter in the interest of the consumers, investors and the power sector in general.

To understand the rationale for this intervention, it is best to quote from the commissions order: This Commission has been vested with the function under clause (b) of sub-section (1) of Section 79 of the Act to regulate the tariff of the generating companies having a composite scheme for generation and sale of electricity in more than one State. It has been held by the Honble Supreme Court in a catena of judgements that the power to regulate confers plenary power over the subject matter of regulation. Since the Commission has the plenary power to regulate the tariff of the generating stations, which fall under its jurisdiction which shall extend beyond the determination of tariff, keeping in view the objects of the Act to promote competition, encourage investment in electricity sector and protect consumer interest. The power to regulate tariff will also extend to the tariff determined through the competitive bidding. Therefore, if the situation so demands, the Commission can fashion a relief even in case of the tariff of the generating stations, which have been discovered through the competitive bidding, by providing for suitable adjustment in tariff while retaining the sanctity of competitive bidding under Section 63 of the Act.

The commission recognised its responsibility to balance the interest of the consumers with the interest of the project developers while regulating tariff of the generating companies. Keeping in view the interests of both project developer and consumers, it directed the generator and the state utilities to engage in a consultative process through a committee to find out an acceptable solution in the form of compensatory tariff over and above the tariff decided under the PPA to mitigate the hardship arising out of the need to import coal at the benchmark price on account of the Indonesian regulations.

While accepting most of the recommendations of the committee report, the CERC held that the incremental profit method should be considered for sharing mining profits from Indonesian mines for adjustment in the compensatory tariff. It also directed that generators shall contribute 1% (0.25% for Adani Power to Haryana utilities) of the return on equity invested by it in the project towards reduction of compensatory tariff.

To sum up, what the commission seems to say is: in the last six years, the share of private investment in generation has gone up from 11% to 31% and India today has installed capacity of 230 GW and considering the number of plants already under construction, the share of private sector will reach nearly 50% by the end of 12th five-year Plan in 2017. But private investment in 18th Plan is uncertain. Unless the problems faced by private investors are addressed pragmatically, this momentum cannot be sustained.

(This is the first of a two-part series)

Pramod Deo & Vijay M Deshpande

Deo is former chairman and Deshpande is an energy economist

and former principal advisor (economics), CERC