Adani Power wants the committed buyers of power from its Mundra project to not only compensate it for the increase in imported (Indonesian) coal price since September 2011, but would also like the hapless discoms in Gujarat and Haryana to bear the extra import bill attributable to the rupee-dollar exchange rate change between 2007 and now. Despite having won the contracts through tariff-based competitive bidding five years ago where it quoted non-escalable fuel charges apparently on the strength of its interest in Indonesian mines, the firm in its plea to the Central Electricity Regulatory Commission (CERC) sought an increase of around R1/kilowatt hour in fuel costs over the levelised tariff quoted at the bidding stage.

Adani also used an exchange rate of R55 to the dollar (close to the present level) to estimate its purported loss owing to the increase in Indonesian coal price. At the time of bidding, the rupee was at 45. Adani, which uses a blend of domestic and Indonesian coal for the Mundra project, quoted the CIF price of Indonesian coal at $92/tonne in its CERC submission while the average price of imported Indonesian Melewan and Enviro coal during the relevant period (September 2011 to January 2013) was just $77.80 and $72.20, respectively.

Contesting the tenability of a revision of tariff discovered through competitive bidding in 2007 where Adani Power opted to assume the risks of fuel cost escalation, Gujarat Urja Vikas Nigam (GUVNL), one of the buyers, had questioned these estimates in its response to Adani?s petition. A similar submission was made to CERC by the Haryana utilities, the other consumers and parties to the power purchase agreement (PPA).

It?s pertinent to note that the regulator in its order early this month was keen to protect the sanctity of the PPA, even while providing a package of ?compensatory tariff? to Adani and later to Tata Power in a similar case.

It is another matter that the Indonesian coal price has since fallen and as stated by the CERC member S Jayaraman in a separate order, the petitioner might not have a case to seek tariff relief even on that limited ground. And, as Jayaraman observed, there is indeed a need to examine the transfer price of coal between Adani Group?s Indonesian subsidiary and Adani Enterprises, the parent company of Adani Power. What is to be found is the financial impact on the group as a whole due to Indonesia?s decision to link its export price of coal to an international benchmark.

The committee set up by the CERC to decide the quantum of compensatory tariff for Adani Power would do well to look at these aspects in detail and in their totality. Leave aside the question of whether the sanctity of tariff determination through competitive bidding should be compromised and a party which secured the contract by outbidding others and taking the associated risks upon himself, be compensated later for his ?mistake? or ?miscalculation,? the CERC order could set a precedent (perhaps a not desirable one) from the regulatory standpoint, while apart from Adani Power and Tata Power, at least one more company ? Reliance Power ? could benefit from it.

Significantly, in its order, the CERC noted that returns for investors in the power sector should be at par with, if not in preference to, other sectors. Heeding Adani Power?s plea for revision of tariff discovered five years ago through competitive bidding, the regulator gave it a package of ?compensatory tariff? to make good the losses arising from the (unforeseen) increase in the Indonesian coal price effective September 2011. The quantum of additional tariff would be determined by a designated and adequately representative committee and this extra tariff, while being over and above the tariff quoted by Adani Power at the bidding stage (without disturbing it), would be ?temporary? and strictly commensurate with the increase in fuel cost due to the policy change in Indonesia. The compensatory tariff would be adjusted with the relevant extra coal cost and withdrawn when no escalation in cost is found, the regulator affirmed, while refusing to invoke the force majeure clause in relation to the relevant power purchase agreement , as it is ?a well settled principle in law that increase in prices of a commodity does not lead to impossibility of performance under a contract…. (and since) the provision of force majeure provided in the PPA is made for saving the agreement from being frustrated.?

It is doubtful if the CERC indeed maintained the sanctity of the competitive bidding process and the contracts (power purchase agreements) entered into between the power company and the Gujarat and Haryana discoms. Be that as it may, the regulator?s majority (3 against 1) order, apparently based on the rationale that consumer interests are best served by allowing pass-through of costs and spurring investor interest in the sector, seems to have brought to surface a key policy question: is it incumbent on the government/regulators to ensure profitability to investors who have voluntarily assumed commercial risks at the bidding stage?

Of course, the policy of allowing pass-through of fuel costs is soon to be affirmed. The ministry of power is planning to modify the standard bidding document for large power projects with this end. However, as Jayaraman stated in his dissenting order, this policy should only have prospective application. Those supporting CERC orders would contend that levelised tariff being discovered by the distribution companies in various states now are much higher, in the range of Rs 3.50/kWh to Rs 7/kWh. The regulator is right in his assertion that ensuing remunerative (if not competitive) returns on investments in the power sector is crucial for capacity addition and ultimately in the consumer?s interest. But there is no reason to allow fuel charges to be a profit centre for companies. Regulatory intervention does not augur well to compensate for the risks that companies sought to take at the bidding stage to win contracts.

As per the Central Electricity Authority, the cost of supply of power per kWh had increased by a substantial Re 1 since 2004-05 to Rs 3.54 in 2009-10, widening the gap between the cost and realisation to 86 paise. Considering the increase in fuel (coal and gas) costs, this gap must have since increased more sharply. The proposed price revision (near doubling) of domestic gas price and the inevitable reliance of power plants on imported coal, mostly more expensive than domestic variants, promises to increase cost of power supply to much higher levels. Power producers will have to gauge these facts when they seek to finalise power purchase agreements with distribution companies.

As per its original bid price, Adani Power is required to supply power from its Mundra station to GUVNL at Rs 2.35/kWh (comprising levelised energy charges and capacity charges of Rs 1.35 and Rs1, respectively) and to Haryana utilities at Rs 2.94/kWh. While Adani, citing the hike in Indonesian coal price sought an increase in fuel cost over the quoted tariff of Rs 1.12/kWh, the GUVNL illustrated that the actual increase could be a meagre 14 paise. Tata Power which also got a favourable order from CERC on Monday, however, did not seek relief based on altered exchange rate. The company?s bids were placed in dollars as its Mundra Plant is totally dependent on imported coal.