Why CERC’s compensation to Tata, Adani for high coal prices sets dangerous precedents and dents competition
March 2nd, 2014

An effective bailout, amounting to a couple of thousand crores, of power plants owned by the Tatas and Adanis by the Central Electricity Regulatory Commission (CERC) sets many deeply worrying precedents for the power sector. Perhaps the biggest one is that it questions the basic principle underlying electricity reforms since the ’90s — the competitive procurement of electricity.

Till now there were two ways to set ‘wholesale’ power prices — the price of power paid by a distribution company to a power plant. There was the earlier costplus method which still applies to public sector power producers like NTPCBSE -2.51 %. Under this system, power prices are regulated and capped after allowing for costs and a defined profit margin. The cost-plus method had a number of problems, the most obvious being it gave an incentive to a power producer to pad costs. Also, there was less pressure on the producer to be efficient.

he other method — competitive bidding — was seen as the solution to the problems of the first. A distribution company looking for sources of power to supply customers would ask power producers to bid a tariff at which they were willing to supply power, with the winner being the one offering lowest tariff. The tariff set under this process was more or less sacrosanct, with revisions being allowed only under extreme circumstances.

What the CERC order does is effectively provide a way for ..

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Source: Economic Times

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