CERC ruling on compensatory tariff – Tidbits

The ruling few months ago,evoked mixed/confused response from stakeholders. While the  “variable” compensation component linked to global prices brought back cheer to the power producers, the discoms have all the reasons to show their displeasure to the decision.

This article presents in a nutshell , the key points of this case.

First the facts:

Adani Power

States  Affected Capacity Annual loss Bid Tariff Additional tariff sought
Gujarat-1000MW, Haryana-1424MW

Maharashtra,

Rajasthan ,Punjab in some way.

4620MW Rs. 1370 cr Gujarat-Rs 2.345 p.u

Haryana @Rs2.94 p.u

Gujarat-Rs1.11 p.u

 

Haryana-Rs0.64 p.u

 

In the context of this case, another dictum pronounced almost an year ago by the Attorney General, G. Vahanavati, has to be kept in mind.It says,” CERC has the jurisdiction to regulate/revise or consider the appeal for tariff revision in case the power generating company sells power to more than one state and has signed legally binding PPAs.”

The case:

For Adani Power–  The company seems to have taken full advantage of the lacklustre approach of the policy making bodies, few instances of which are as below:

  • Adani Power had MOU with Adani Enterprises Limited (another Adani Group Company),which held 74% of shares in the Indonesian coal company through which the coal was to be imported. Any increase in price of coal would always directly benefit the Indonesian company which in turn would be passed to Adani Enterprises in the form of return on investment and thus the Adani Group as a whole would turn out to be the ultimate beneficiary of the Indonesian regulations. Similarly, the consequence of a fall in prices are also quite clear .
  • While bidding for Gujarat discoms, it only submitted the MoUs from Kowa and Coal Orbis and commitment letter from GMDC. There was never an assurance of supply of fuel from any source, which in any case was not demanded in the bid documents.
  • Its bid included uniform “Non-escalable capacity charge “and “Non-escalable energy charge” for each contract year.
  • For Haryana bid It again submitted the MoUs with Kowa Company and Coal Orbis by Adani Enterprises Limited.
  • The prices of the above agreements were amended a no. of times much later the PPAs were signed.

For the discoms :

  • It is evident that PPA was not contingent upon the FSAs between the Adani  Power and AEL and also does not prevents it to arrange coal from alternative sources.
  • The export price of coal from Indonesia has still been cheaper than coal exported by other coal-exporting countries like Australia and south Africa.
  • In a nutshell ,the company won the UMPP bid by aggressive and predatory bidding approach.

The relief sought by the petitioner  filed by the power producer clearly goes against the spirit of section 63 of the Act as it seeks to convert a tariff discovery under section 63 of the Act into tariff determination under section 62 of the Act which is not permissible.

Such absurd events occur when there is a problem with the basic premise on which the activities depend. The allocation of UMPPs in itself is a process marred with conspicuous irregularities. For the sake of introducing competition blindfoldedly , the deciding body failed completely in attending  to the associated facilities of the generator. Afterall , it is that meagre tariff which has now become improbable and is being attempted to recover by further amendments in the PPAs.

Here we must also note that this case is not much different from the one of retrospective taxation of Vodafone ,which was subjected to huge criticism. The two decisions are equally unfortunate (but required ) and weaken the policy framework of country.

Impact on discoms

The distribution companies already reeling under humongous burden and criticised frequently for any hike in tariffs ,due to populous stance of the ruling government ,would again land up in the troublesome zone. To prevent further widening of the ARR-ACS gap, discoms would need to raise the tariffs. The recently implemented restructuring plan would also come under pressure .  The capex plans would go haywire. Other problems known widely , more issues would surface in times to follow. Such instances could possibly drag the discoms back in the red zone. The Gujarat discom would have to face an unsurmountable burden of Rs. 1600 crores (Rs 790 cr/year of Adani Power & Rs. 900 cr/year of CGPL).

Now with the submission of report by the appointed committee just a few days back, the murmurs in corridors are becoming loud and clear about introduction of the provision of compensatory tariff for these power plants, corresponding rate & the duration.  We can only hope that, this doesn’t sets a precedent for future judgements and, policies be redone a bit to ensure that sanctity of agreements is not violated in future.

Also, for ages Companies all over the world have been making their ventures a success by locating the loopholes in governement’s policies . Infact this and any other case similar to this must pique the officials for providing a better policy framework.

 

Ref: CERC document, News articles

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