The power pricing mess

Companies ought to be aware of the volatile nature of global fuel prices and their effect on agreements that have pre-determined or agreed tariffs.

 

On Wednesday, the Central Electricity Regulatory Commission (CERC) issued a far-reaching order that has opened the door for renegotiation of tariffs agreed between private power producers and buyers of power in the public sector, especially state power utilities.

On the face of it, the decision is a balanced one. In the case under consideration—that of Adani Power selling electricity from its Mundra plant in Gujarat five years ago—there were disagreements between the power producer and buyers. This was due to higher fuel costs arising from the price of imported coal shooting up dramatically. Adani Power, which sourced coal from Indonesia, claimed that a recent change in Indonesian law disallows sale of coal at prices lower than the global levels. The company claimed that at the present pace its plant will “go under” in two years. It said losses have already risen to Rs.1,350 crore.
The buyers—Gujarat and Haryana—said that when they floated bids to procure power, they didn’t pick up the fuel supply risk. And, to allow companies to bear fuel risk, they asked the bidders to quote an “escalable” component. Adani, however, wagered a nil tariff on this count and went horribly wrong.
The regulator has argued that if this power generation capacity of over 4,000MW were to be created now, the tariff would be higher than the increase sought by Adani Power. And, given the prevailing power shortages, there is need to ensure adequate returns to investors. To its credit, the regulator has disagreed with the rest of the arguments put forward by Adani, including the change of law in Indonesia.
Against this backdrop, it has now ordered the buyers to sit down with the seller and hammer out a mutually agreeable tariff. To lend credibility to this process—a difficult task since government-negotiated tariffs have a notorious history dating back to Enron’s Dabhol plant in the early 1990s—the regulator has said there is room for two independent members, a financial analyst and a banker of repute in the negotiating committee.
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