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SC hope for Tata/Adani, but why did it take so long? PDF Print E-mail
Wednesday, 31 October 2018 00:43
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Despite a faulty policy causing the problem, it has taken more than five years to get relief even though it was a win-win for all

 

Stock prices of both Tata Power and Adani Power rose significantly after the Supreme Court (SC) offered a ray of hope for their Gujarat power plants by asking the Central Electricity Regulatory Commission (CERC) to consider a report by a Gujarat government panel headed by a retired Supreme Court judge that recommended steps to prevent the plants from continuing to haemorrhage. Under the plan that CERC will get eight weeks to decide upon, the power plants—including one belonging to Essar Power—will take some of the hit arising from the sharp rise in costs of imported coal while some part will be passed on to consumers. In order to keep the hit to consumers low, the power purchase agreement will be extended by another 10 years to ensure they can get cheaper power from a fully depreciated plant later. The plants will also have to work at a higher capacity in order to lower per unit electricity supply costs. The biggest relief for all three plants, of course, is that, unlike in the past where the costs of coal were fixed, they will now be a pass-through—if prices rise, consumers will pay more and vice versa. If the CERC agrees to the panel’s proposals—all states buying power from these three plants were represented on the panel—this will help resuscitate nearly 10,000 MW of power built at a cost of around `50,000 crore; immediately, tens of thousands of crores of bank loans will no longer be at risk.

What is worrying, however, is that politics derailed a solution for more than five years already; the approach of various courts added to the problem when the problem clearly lay in the way the law was formulated. Given how volatile energy prices can be, all bidding in the country took place on the basis of the capital costs—which the entrepreneur had control over—while fuel costs were always a pass-through. For reasons best known to it, the power ministry asked bidders to quote a coal price for 25 years; not surprisingly, all power producers got it wrong and so, when prices of imported coal from Indonesia shot up dramatically due to a change in the local law, the plants approached CERC and asked for the event to be declared force majeure so that they could get appropriate relief. Ideally, however, no power producer should have even been asked to take on a risk that it was never in a position to deliver on.

What followed then made things worse. While CERC ruled the event didn’t qualify as a force majeure, it gave them relief—via a committee set up to determine the amount of compensatory tariff—since, apart from protecting consumer interests, CERC argued, its responsibilities included ensuring a healthy growth of the industry. With various state electricity boards (SEBs) unwilling to pay more, they approached the appellate tribunal, ApTel, which ruled against the compensatory tariff, but said the event qualified as force majeure. CERC then determined new tariffs using this clause but, last year, the SC ruled against ApTel’s force majeure ruling. So when SC is now directing CERC to examine the Gujarat government panel’s recommendations, it is, in a sense, really going back to the original CERC formulation.

Even more worrying than the possibility of further delay—since any consumer group or anyone else free to challenge whatever decision CERC takes—is the fact that, even now, there is no established method of reworking infrastructure projects when required. Any project that is bid out for 25-30 years, or even more, is going to run into problems at some point, so it makes sense to have systems to rework contracts in as fair a manner as possible for all stakeholders when this happens. Since this system is not in place, banks stood to lose tens of thousands of crores along with various entrepreneurs when a problem arose. Worse, as CERC pointed out, the compensatory tariff shouldn’t even have been an issue since, even after that, the power from these plants still cost much less than from other sources. So, even though it was a win-win for all concerned, the projects never got the relief they deserved, more so because the problem was the direct result of faulty government policy.

 

 

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