When, subsidies and in turn, fiscal deficit gets out of control, the eyes of the whole nation are set on it and all institutions, experts and financial wizards frantically look for steps to set things right. But, when it comes to dealing with factors that cause hike in subsidies/deficit, everyone turns a nelson eye; instead of taking corrective measures, they abet actions to perpetuate the malady. The case of ultra mega power projects [UMPP] vividly illustrates this.
Tata Power Ltd [TPL] and Adani Power Ltd [APL] had bagged such projects 4000 MW and 4620 MW respectively under tariff-based competitive bidding [TBCB] to supply power at fixed tariff all through project’s operational life. The tariff in case of Tata was Rs 2.26 per unit whereas for Adani it was Rs 2.35/Rs 2.94 per unit for supplies to Gujarat/Haryana. While, TPL is based entirely on imported coal, APL is 70% domestic and 30% on imported coal.
The power purchase agreements [PPAs] with state electricity boards [SEBs]/power distribution companies [PDCs] made it clear that the impact of any fluctuation in the cost of fuel has to be absorbed by power generator [read TPL/APL]. The intent was to keep SEBs/PDCs immune from such variations. This indeed was the raison de atre for sanctioning these projects under TBCB route with fixed tariff.
In September 2011, Government of Indonesia imposed a minimum ‘benchmark’ price below which coal from that country could not be exported. This led to significant increase in cost of fuel to these projects, more so for TPL which was dependent entirely on coal imports from that country. In 2012, both Tata and Adani petitioned Central Electricity Regulatory Commission [CERC] seeking ‘compensatory tariff’ to neutralize the cost escalation – a totally untenable demand.
Yet, CERC promptly ordered a compensation package [April, 2013] and appointed a committee under Deepak Parekh, Chairman, HDFC to do the sums. The committee lost no time in recommending tariff hike of 52 paise per unit for Tata and 41 paise per unit for Adani [August 2013]. The hikes were sanctioned by CERC in February 2014.
While, allowing the hike, the commission violated the sanctity of PPA in gross contravention of the role expected from a regulator. It was also completely oblivious of the impact this would have on the consumers of electricity. The states normally supply electricity to farmers and households at subsidized rates. This means any cost push will increase subsidy payments and in turn, higher budget deficit.
Seeing red, the SEBs/PDCs petitioned the Appellate Tribunal for Electricity [APTEL] [March 2014] against the decision of CERC. APTEL too acted with alacrity in showering its benevolence on the business conglomerates albeit at the cost of state finances. It issued an interim order [July 2014] allowing tariff hike prospectively. But, this was stayed by Supreme Court [SC] who directed that it should first complete the proceedings before it.
In its order [April 2016], APTEL observed that “CERC had no powers to modify tariff that were set under PPAs through TBCB”. Yet, it allowed relief to companies through a different route viz. “force majeure” clause. They were given the benefit of this clause on the ground that increase in Indonesian coal price – as also price hike triggered by reduced supply of domestic coal [affecting APL] – were beyond control of the companies. The argument is flawed.
When, a company procures fuel, there is always a risk of change in price due to a variety of factors including regulatory intervention. This is an ‘endogenous’ factor that it necessarily takes in to account while assessing viability of the project [to guard against such contingencies, TPL even held equity 25-30% in 3 Indonesian mines]. The same logic applies to price hike arising from changes in domestic regulations such as reduction in supplies from Coal India Ltd [CIL] – monopoly supplier of domestic coal.
The SC was no less compassionate in dealing with recalcitrant power generators. It allowed CERC to determine compensation for increased production cost; however, such determination was subject to the scrutiny and orders of the apex court. In December, 2016, the commission came up with a formula to compute compensation.
In its order [April 2017], SC has rejected the claim of Tata/Adani for compensatory tariff under force majeure clause but only to an extent the hike is caused by increase in price of coal imported from Indonesia. In respect of domestic supplies however, it has agreed with the interpretation of APTEL. In other words, the generator [APL] will be compensated for increase in cost caused by domestic disturbance. Giving this concession is illogical and unfair to users.
If, a company is forced to pay higher price for coal, this is solely because the supplier [read CIL] backed out of its commitment to supply the agreed quantities. Logically, the extra cost should be recovered from CIL subject to provisions of fuel supply agreement. By any stretch of imagination, the consumers cannot be made to pay for it, all the more when PPA provides for fixed tariff.
It is baffling that while on one hand, the government struggles to bring bleeding SEBs/PDCs back to health [in 2015, it sanctioned a financial restructuring package (FRP) to clear a mammoth over Rs 400,000 crores debt involving a lot of sacrifices by states and banks] on the other, this task is made more and more difficult by allowing unabated increase in cost to generators. Ironically, even the regulators and judicial authorities whose prime role is to protect the interests of consumers and the exchequer, have complicity in letting this happen.
Modi – government exudes confidence that consequent to implementation of FRP and a couple of other complementing measures, such as improving power generation efficiency and reducing theft, the SEBs/PDCs would be nursed back to health in the next 3-4 years. But, this will remain a distant dream if it does not stop treating power generators with kid gloves.