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Monday, 24 February 2014 00:00
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CERC makes the right call on compensatory tariff

Given that none of the state electricity boards (SEBs) concerned were willing to pay a higher price to either Tata’s Coastal Gujarat Power Limited or Adani Power Limited whose costs were badly affected by the change in coal prices due to new Indonesian coal regulations, the Central Electricity Regulatory Commission’s (CERC) job was always going to be a tough one. More so since, as CERC itself recognised, the new Indonesian law could not be either considered a ‘force majeure’ or a ‘change in law’ as counsels for both firms argued while looking for tariff hikes. CERC rightly argued that, since the Indonesian laws did not prohibit the export of coal – only the price was raised – there was no ‘force majeure’; as for ‘change in law’, if changes in foreign laws were to be considered, there would be no end to what factors would need to be taken into account by CERC or other Indian courts.

In the event, CERC made some reasoned arguments and found that it had strong basis in the law for deciding on a compensatory tariff hike. CERC argued that since the tariffs of the power plants were reasonable, and shutting them down was the only alternative to not hiking tariffs – the Tata power plant makes annual losses of Rs 1,800 crore right now – consumers in all states would end up either having large electricity shortages or paying much higher prices to other suppliers. Having set up the framework for why providing for compensatory tariffs was in everyone’s interest, CERC used Section 61 of the Electricity Act which lays out the principles for tariff setting and Section 79 that gives CERC the power to regulate. In a normal transaction between a buyer and seller, the act of buying tomatoes for instance, the buyer is free to walk out if the price is too high, and the seller has the option to find another buyer. In the case of utilities, however, this free-market principle does not operate. Which is why Section 61 of the Electricity Act says the CERC’s job is “safeguarding of consumers' interest and at the same time, recovery of the cost of electricity in a reasonable manner”; and that “the tariff (must) progressively reflects the cost of supply of electricity”.

And to balance consumer and producer interests, CERC has cut the return on equity for both companies by 1 percentage point. In the Tata case, the profits of the Indonesian coal mines it also owns will be used to set off some of the tariff impact and, in both cases, power produced above 80% plant capacity can be sold in the open market and the profits from here used to defray some of the tariff impact. In this election season, some SEBs are certain to contest the order, but it can’t have been any fairer to all concerned.


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