So who really cares about the investor?

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Published: July 20, 2020 6:00 AM

The fate of the Tatas’ 4,000-MW power plant remains uncertain nearly a decade later; ditto for others like Adani.

The CERC, though, appreciated the plants’ problem and said that while it was mandated to look after consumer interests, ensuring the industry remained healthy was also its concern. The CERC, though, appreciated the plants’ problem and said that while it was mandated to look after consumer interests, ensuring the industry remained healthy was also its concern.

Eleven thousand crore rupees of losses, and almost a decade later, Tata Power suffered another hit when, last fortnight, the Gujarat government decided to cancel the tariff hikes given to its power plant; so did others like the Essar and Adani groups who got similar relief in 2018. At a time when a fourth of the prime minister’s Rs 100-lakh-crore infrastructure plan depends upon investments made in the power sector, it is amazing that such little effort has been made to sort out something so critical.

The story of these plants, with around 11,000 MW of installed capacity, started in the 2000s with a big policy goof up. Till then, India had a two-part tariff for electricity. Since an entrepreneur’s main job—and risk—was to complete a project while keeping costs down, a ‘capacity charge’ was paid for this. Since fuel costs were typically outside the control of the power producer, these were a ‘pass-through’—if prices of coal went up, the electricity tariff rose and vice-versa; this part of the tariff was just passed on to the fuel supplier.

For some reason, however, the power ministry wanted a single tariff; the power producer had to take a call on what coal/gas prices would be for 25 years—the typical length of a PPA—and just quote one price. Can you imagine an IOC quoting a fixed price for petrol/diesel purchases for 25 years? It was a disaster waiting to happen, and that is precisely what happened.

There is little doubt that when the Tatas/Adanis/Essar bid to supply electricity to SEBs in Gujarat, Maharashtra, Haryana, Punjab and Rajasthan, they did so knowingly; but if the rules force you to take unnecessary risks, you have no option as the alternative is no business. The Tatas zeroed in on Indonesia, where prices had been steady for decades; others like Adani, in addition, also depended on local coal supplies from mines that they were promised. Coal India’s inability to supply enough coal was, in any case, well documented, so few chose to rely on it while bidding.

In 2011, Indonesia raised export prices of coal considerably. Staring at huge losses since no SEB wanted to pay more for the electricity, Tata/Adani/Essar approached the Central Electricity Regulatory Commission (CERC) for relief on grounds that the Indonesian action constituted a ‘change in law’ and/or a force majeure, so the PPA could be reworked. The CERC, rightly, ruled that a change in Indonesian law couldn’t possibly be relevant for firms doing business here, and it certainly wasn’t a force majeure since, the losses apart, nothing stopped the power plants from fulfilling their obligations under the PPA while a genuine force majeure—like a devastating earthquake—clearly would.

The CERC, though, appreciated the plants’ problem and said that while it was mandated to look after consumer interests, ensuring the industry remained healthy was also its concern. And were the plants to shut, it added, and the SEBs forced to buy power from elsewhere, this would cost a lot more. A committee under HDFC chief Deepak Parekh was asked to recommend a compensatory tariff after hearing all sides; this recommendation was then confirmed by CERC in 2014 after a public hearing.

Everyone should have accepted this, but the SEBs challenged CERC at the Appellate Tribunal for Electricity (Aptel). Aptel ruled against the compensatory tariff, but said this was a case of force majeure and asked CERC to determine the tariffs keeping this in mind; CERC did this.

The story is complicated, and made more complex by the fact that, for instance, one of the Adani plants was based on local coal that was to come from a mine that a Gujarat government entity had promised to allot it, but had failed to do so; as a result, Adani terminated its PPA but this was challenged and, eventually, that too reached the Supreme Court (SC). There were, in parallel, appeals filed by the SEBs as well as consumer bodies against Aptel’s force majeure ruling. In April 2017, SC ruled against force majeure, but upheld the right of generators (Adani) to be compensated for the shortfall in local coal supplies, and also said that if there was a situation that was not covered by the existing guidelines, the CERC was free to use its regulatory powers under Section 79(1)(b) of the Electricity Act.

More interesting, while talking of contracts and the assumption of risk between parties, SC added that it wasn’t just what was in the contract that mattered, it was also the ‘contemplation of the parties’; that is, if the situation changed to something no one had contemplated—the change in the Indonesian law—the contract could be relooked. Sadly, the government has ignored this critical ruling while dealing with infrastructure projects in trouble.

While the Supreme Court paved the way, the SEBs still had to be approached individually. The central government then formed a working group on the matter, and a high powered committee (HPC) was then set up by the Gujarat government since it bought the most power from these three plants. The HPC was headed by former SC justice RK Agrawal and its members included former RBI deputy governor SS Mundra and former CERC chief Pramod Deo. The HPC then came up with a resolution in October 2018, and pointed out, for instance, that if the power plants held back supply as they were making losses, Gujarat would have to buy more expensive electricity. After all sides, including the bankers, were asked to take a hit, a formula was devised on how the fuel costs would be paid for.

Last fortnight, however, the Gujarat government decided to reverse its decision and said, the “matter of signing supplemental PPAs … will be decided on a case to case basis”. Mint reported the Gujarat government order as saying “supply of power to Gujarat … shall not be at a higher tariff than the tariff charged to other procurer states”; none of the others had hiked tariffs. For the Tatas, after having lost Rs 11,000 crore already, it will be an uphill task to now try and convince the other states to hike tariffs; ditto for the Adani and Essar groups.

While the three firms will, nonetheless, try and negotiate with individual SEBs—and the central government got a legal opinion to bolster this a few months ago—surely firmer action should have been taken close to a decade ago? Article 39(b) of the Constitution—which was used to cancel A Raja’s 2G licences—talks of how the “the ownership and control of the material resources of the community are so distributed as best to subserve the common good”. Even in a self-avowed socialist country like India, most would agree capital is a national resource that needs to be looked after. Given the losses these promoters—and the banks that lent to them—have suffered, who would ever want to invest in India? And, certainly not in long-gestation infrastructure projects like power where, apart from problems like not renegotiating a contract when it is in trouble, even routine SEB dues are not paid; these are reported to be around Rs 100,000 crore right now.

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