A Rethink on India’s Power Pricing

All eyes this week and over the next few weeks will be on a report to be submitted to the Central Electricity Regulatory Commission (CERC) on a ‘compensatory tariff’ for Adani Power and Tata Power. Indian Coal Report has the details.
 
BRISBANE, Australia - June 4, 2013 - PRLog -- CERC is a statutory body functioning under the Electricity Act 2003. The commission seeks to promote and safeguard competition and efficiency in the power sector, promote investments and advises government on the removal of institutional barriers in the sector.

In a historically important ruling last month, it judged that “compensatory tariff” could be permitted for the 4,620 Mundra Power Plant promoted by Adani Power Limited (APL) and the 4,000 MW Mundra Ultra Mega Power Plant promoted by Coastal Gujarat Power Limited (CGPL), a special purpose vehicle of Tata Power for the plant.

APL and Tata Power had petitioned the commission for a revision of the existing power tariff that they had agreed in 2007-08. They argued that unexpected changes to Indonesian regulations on coal exports had led to an increase in imported coal prices under and consequently thetariff agreement was not viable anymore.

Both companies had secured the right to develop the plants under a competitive bid by offering the lowest power tariff offer. Bidders were expected to secure their own coal sources and manage fuel risks.

Tata offered to supply electricity at Indian Rupees (INR) 2.26/kWh (US$ 41.85/MWh at current exchange rate of INR 54 = US $1) to seven state owned distribution utilities in northern and western India. Similarly, APL had agreed to supply electricity at rates ranging from INR 2.34/kWh ($43/MWh) to INR 2.94/kWh ($54/MWh) to Haryana and Gujarat.

Tata claimed that without any tariff adjustment it would lose approximately $350m annually and $8.8B over the 25 years of the agreement.

The CERC hearings were mostly on points of law and less on points of technical fact. It involved issues of Force Majeure and at occasions challenged the authority of the CERC to hear the case. CERC decided that they could, although both rulings had one dissenting member.

In the end CERC ruled on matter of law, that the Force Majeure could be invoked. But it left the specifics of the settlement, which involve more detailed technical issues on how the cost impacts are to be evaluated and its impacts assessed, for future consideration.

In both rulings, CERC directed that a committee consisting of the principal secretary of the affected states (purchasing distribution utility), a company representative, independent financial analyst and banker be established. The committee has been tasked with making an independent assessment of how changes in Indonesian law affected coal prices, the resulting impact on tariffs and the required ‘compensatory tariff’ adjustment.

In making the evaluation, the committee will have to also assess if changes in Indonesian law are resulting in higher margins at the Indonesian coal companies where Tata and Adani own stakes. If so, those additional earnings must be taking into account. It must also take account of revenues that plants make of short-term or non-committed power sales outside of the power purchase agreement.

The report from the committee was to have been prepared by 15 May. Details of the report have yet to be made public.

CERC’s ruling opens the door to further judicial challenge. It has ruled on a matter of contract law but left open technical cost determination by opting for the committee. A less uncertain approach may have been to have a court rule on contract law and then allow CERC to rule on the technical cost impact determination, if that were subsequently required.

The state of Haryana has already challenged the CERC ruling in the appeals court, while also agreeing to serve on the committee established by CERC. Other states are expected to follow Haryana in court.

The parallel tracks of the judiciary and CERC will mean an uncertain environment that will linger on until the Supreme Court has weighed in. That could be a long time.

Shortly after the ruling, CERC agreed to hear a petition from Reliance Power seeking a tariff revision on its 4,000 MW Sasan Ultra Mega Power Plant.

Reliance is claiming that the exchange rate erosion has adversely affected the plant’s viability. At the time of wining the bid, the Indian rupee was trading at around INR 44 to 1 US$. It has depreciated significantly since then and is currently at around INR 54. In addition, it is seeking to invoke the change in law clause on the fact that adjustment to the diesel prices, which are administered prices in India, has hurt the plant’s viability.  

CERC’s decision to allow a tariff adjustment introduces the first important course correction on India’s experiment on power pricing. The premise was that power developers could be asked to bid of power tariff while expecting them to manage all of the risks.

As it turns out, power plant developers cannot manage all of the risks. Though they don’t disclose it in their bid, they rely on the government (the counter-party) to assume and hedge part of the risks.

Whether India will continue with the same approach in developing imported coal based power plants remains unclear. But one clear and natural outcome of this mid-course correction will be a clear acceptable index for imported coal price relevant to Indian power plants.

For more news and analysis on the Indian coal and power industries, subscribe to Energy Publishing’s Indian Coal Report.  With staff on the ground in India and the benefit of experienced journalists and analysts across the Asia Pacific region, the Indian Coal Report offers the latest news, in-depth analysis, market briefs and freight indices.  Visit our website at http://www.coalportal.com, or contact us at epi.coalinfo@ihs.com for a free trial subscription.
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