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Friday, 11 October 2013 00:00
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Unfortunate that states unwilling to negotiate

States like Punjab and Haryana that are protesting against the Deepak Parekh renegotiation committee’s recommendations for a tariff hike formula for Tata Power’s UMPP at Mundra are being short-sighted. There is little doubt Tata Power got its bid wrong, as did many others—as of now, all four UMPPs plus Adani’s Mundra plant are before the Central Electricity Regulatory Commission (CERC), asking for tariff revisions. To a large extent, the government created the problem when, under what was called the single-part bidding formula, power suppliers were encouraged to take a call on what fuel prices would be for a 25-year period—till then, fuel supply costs were always passed on to consumers. While this is something the government is trying to fix through a new bidding framework, there is little doubt the Tatas and others like Reliance Power and Adani Power went and bid with their eyes wide open.

But what is done is done, and with the prospects of huge losses facing the power producers, those like Tata and Adani Power approached the CERC. Since the matter was a technical one, the CERC appointed Deepak Parekh to examine the claims of the power producers and the counter-claims of the power buyers, the state electricity boards (SEBs). In the case of the Tatas, for instance, since the company also benefits from the increased minimum export price in Indonesia—it owns a 30% stake in two major coal producers there and also 26% in another—this needed to be taken into account. If the Tatas needed to take a haircut, as indeed they should, how much was this to be? This had to be balanced out by the maximum fine that Tata Power would pay if, instead of generating at a loss—under the contract, there are penalties for short-supply—the company just decided not to supply power, or to supply less power.

Which is why, after the committee has done all the hard work, it comes as a surprise that some of the states have filed affidavits against the report. While one part of the affidavit of the Haryana SEB makes sense, the one that says it has to be given the same treatment other states get, the states have to keep in mind the counterfactual—that if they don’t buy the power from the Tatas, or the other UMPPs that are looking for similar fuel price adjustments now, they have the option of either not having enough electricity supplies or of buying it at higher prices in the market. Post-bid negotiations have a definite element of moral hazard, but the alternative—of finding new suppliers and possibly long-drawn court cases—isn’t particularly attractive either.


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