Tata Power, Adani Power hit by Supreme Court order on compensatory tariffs; losses logged at Rs 4,300 cr, Rs 3,600 cr respectively

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New Delhi | Published: April 12, 2017 5:49 AM

A Supreme Court order on Tuesday rejected the claims of Adani Power and Tata Power to recover compensatory tariffs for an increase in the cost of power following an unexpected rise in the price of imported coal.

The Supreme Court set aside the Appellate Tribunal for Electricity’s (Aptel) April 2016 order that held that force majeure be invoked to compensate the companies for the under-recoveries in the FY13-FY16 period. (Reuters)

A Supreme Court order on Tuesday rejected the claims of Adani Power and Tata Power to recover compensatory tariffs (CT) for an increase in the cost of power following an unexpected rise in the price of imported coal. On a rough reckoning the firms have lost Rs 4,300 crore and Rs 3,600 crore respectively.

The Adani Power stock took a harder hit after the apex court’s ruling as it had fully recognised the compensation in the books for FY16—the stock plunged 17.6% during the day ending the session at Rs 37.20. Tata Power settled at Rs 85.40, down 2%, after falling nearly 7% during the day.

The apex court set aside the Appellate Tribunal for Electricity’s (Aptel) April 2016 order that held that force majeure be invoked to compensate the companies for the under-recoveries in the FY13-FY16 period. A bench comprising justices Pinaki Chandra Ghose and Rohinton F Nariman, however, gave Adani Power a small relief—the company can now approach the Central Electricity Regulatory Commission (CERC) seeking compensation on the grounds of “change in law”, that is, the change in domestic coal tariff and allocation policy in 2013 that reduced the share of fuel available for power generators. Under its power power purchase agreement (PPA) with Haryana discoms, Adani Power is to source 70% of fuel from domestic sources and the balance from Indonesia. Analysts, however, said this benefit was anyway to be available to the company.

They also pointed out that power from Tata’s and Adani’s PPAs for their Mundra stations, including the compensations, would have still been cheaper than under most other long-term contracts, including those of public-sector NTPC. While the Deepak Parekh panel computed CTs/unit for Adani and Tata at 52 paise (15.5%) and 41paise (23%) respectively on the basis of an April, 2013 regulatory order, a December, 2016 formula by the regulator, derived after Aptel asked it to compute the relief under force majeure, was much more generous to the firms.

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The issue, hanging fire for a more than half a decade, arose after Indonesia amended its law in September, 2011 to effect five-fold increase in coal prices, upsetting the tariff calculations. The companies had won the contracts through tariff-based competitive bidding where they quoted partly escalable or non-escalable fuel charges.

The SC rejected the companies’ stand that a commercial contract is to be interpreted in a manner which gives business efficacy to such contract. The firms had argued the subject matter of the PPA being “imported coal,”, the expression “any law” would refer to laws governing imported coal.

On the force majeure clause, the court said:“the doctrine of frustration cannot apply to these cases as the fundamental basis of the PPAs remains unaltered… Nowhere do the PPAs state that coal is to be procured only from Indonesia at a particular price. In fact, it is clear on a reading of the PPA as a whole that the price payable for the supply of coal is entirely for the person who sets up the power plant to bear… It is clear that an unexpected rise in the price of coal will not absolve the generating companies from performing their part of the contract for the very good reason that when they submitted their bids, this was a risk they knowingly took.”

Observing that the amendment to Indonesian law cannot be reason for invocation of “change in law” provision in the PPPs, the court said: “..relief is available under the PPA itself to persons who source supply of coal from indigenous sources. It is to this limited extent that change in law is held in favour of the respondents.”

Writing for the bench, Justice Nariman observed the definition of law in the PPAs speaks of all laws including electricity laws in force in India. “Once this is clear, at least textually it is clear that “all laws” would have to be read with “in force in India” and would, therefore, refer only to Indian laws,” he wrote.

On behalf of the power companies, senior counsels Kapil Sibal, Harish Salve, AM Singhvi, and C.S. Vaidyanathan argued the fundamental basis of the contract was the fuel supply agreement (FSA) that was to be entered into. They pointed out various clauses in the PPAs to show that the FSA and imported coal were both very important elements, both in the bid and the PPAs. Non-escalable tariffs do not lead to the conclusion that if a source of coal becomes unavailable in a manner that completely undermines the basis of the bid, the tariff cannot be adjusted. Otherwise they fall within the change in law provision and/or force majeure provision, the mere fact that a non-escalable tariff has been quoted would make no difference, they contended.

However, the court said: “We are afraid, we cannot agree with this argument. There are many PPAs entered into with different generators. Some generators may source fuel only from India. Others, as is the case in the Adani Haryana matter, would source fuel to the extent of 70% from India and 30% from abroad, whereas other generators, as in the case of Gujarat Adani and the Coastal case, would source coal wholly from abroad. The meaning of the expression “change in law” in clause 13 cannot depend upon whether coal is sourced in a particular PPA from outside India or within India. The meaning will have to remain the same whether coal is sourced wholly in India, partly in India and partly from outside, or wholly from outside.”

Discoms from Gujarat, Rajasthan, Maharashtra, Punjab and Haryana have PPAs with Tata Power’s (CGPL) 4,000 MW Mundra unit; Adani Power has PPAs to suply power from its 1,980 MW Mundra plant to state utilities of Gujarat and Haryana.

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