On August 25, the Supreme Court handed down a major judgement on the coal block allocation policy of the government. It called the manner such blocks were allotted 'ad-hoc' and 'without application of mind'. Given that nearly 60% of the power capacity in the country runs on coal, it was a judgement with major implications for the sector. But on the same day in the Supreme Court itself, an episode of another case of critical importance for the power sector was played out. With the coal blocks judgement hogging the headlines the next day, the other case received lesser attention.
Pitted against each other in this fight were, on the one hand, two power distribution companies (discoms) in Haryana; and, on the other, two of the largest power generating companies in the country, Tata Power and Adani Power. And while the SC did not hand down a final judgement in that case, what the judges said in the hearing on that day made a lot of people sit up and take notice.
The hearing centred on what has come to be known as the compensatory tariffs case. Whichever way the case finally gets decided, it is clear that the implications, both legal and financial, for the power sector are huge. Even the immediate consequences were hardly minor.
Barely two days after the hearing, Adani Power yanked 1,424 MW of power that it supplies to Haryana from its giant Mundra plant in Gujarat, though it later claimed that the event was unrelated to the SC hearing. It was forced to restore supplies earlier this week following a critical and sharply-worded ruling from APTEL — the appellate tribunal for the electricity sector (on a par with a high court). "Yes, Adani has restored power to us between October 3 and 4," says an engineer with Uttar Haryana Bijli Vitran Nigam, one of the Haryana utilities.
APTEL is also the forum that is currently hearing the overall compensatory tariffs case. And even though the case has not reached its final conclusion, it has spawned a bunch of me-too cases in various courts across the country with companies asking for compensation for everything from unexpectedly sharp rupee depreciation to higher taxes to increases in land acquisition costs. All this, after signing supposedly binding contracts with state utilities.
At the heart of the case are two bids launched in 2007 and 2008 by states such as Haryana and Gujarat, among others — asking generation companies to compete for the right to supply power (the winner is the one that bids for the lowest tariff for the power). Adani and Tata were the winners in those two bids, and they bid the tariffs on the understanding that they would absorb changes in the cost of coal over the life of the bid, though they had the choice to make a bid in a way so as to pass on fuel costs to customers (the discoms). Both companies decided to import coal from Indonesian mines for the projects, located in Gujarat.
ImageA couple of years after Adani and Tata signed the power purchase pacts, Indonesia introduced new rules which set a minimum export price for coal, linked to international benchmarks. Effectively, this pushed up the price of coal for any company importing the commodity from Indonesia, though for the two companies in question, the impact was lower, since they owned equity stakes in the mines they bought coal from. This new law, coupled with the sharp rise in international coal prices at the time, and the weak supplies of domestic coal, made the companies throw up their hands and tell their customers that the power tariffs they had bid were now unviable, and that these should be revised. Further, they asked for compensation for the power they had already supplied at the existing tariffs citing major losses.
The case eventually ended up in the Central Electricity Regulatory Commission (CERC) where Adani and Tata claimed that two clauses in the power agreements — the so-called standard 'force majeure' clause (which allows parties to revise a contract when events occur which are beyond their control, like war) and the 'change in law' clause — allowed them the right to compensation. Interestingly, the CERC rejected both these claims but allowed compensation anyway in a ruling in April last year, and appointed a committee to decide the amount.
In February this year, it decided that Tata should get about '329 crore in past compensation, and that Adani should get '829 crore. The judgement was appealed by states such as Haryana, and APTEL, in July this year, stayed the payment of past claims, but asked states to pay the revised tariffs from this year, till a final ruling in the case. Haryana appealed this ruling as well, and it was this case that ended up in the Supreme Court, and was heard on August 25.
The Supreme Court stayed any compensatory tariff payments altogether till APTEL heard the final case, but the bench told lawyers verbally that if companies had won contracts on the basis of a competitive bid, how could they then later ask for an increase in prices? The judges are reported to have said that in such circumstances companies cannot claim that they are making losses. It was following this hearing that Adani cut power to Haryana only to be ordered to restore supplies by APTEL. ET Magazine sent questionnaires to Tata and Adani, but had not received a response at the time of going to press. But ever since the original CERC ruling, a host of other cases have cropped up. In CERC, Reliance Power's Sasan ultra mega power project is asking for compensatory tariffs following what it called 'unprecedented' depreciation in Compensatory tariffs case: Should power producers be compensated for rock-bottom bids made earlier?the exchange rate of the rupee versus the dollar after it signed PPAs with states such as Haryana, Gujarat and Madhya Pradesh in 2007.
This depreciation increased the cost of dollar loans, leading to losses, thus requiring compensation. That ruling has been reserved for judgement by CERC. In July, the Maharashtra Electricity Regulatory Commission (MERC) ruled on a set of three petitions, concerning the supply of power by Adani, Indiabulls Power and JSW Energy to Maharashtra, and allowed compensatory tariffs to these companies on the grounds of a decline in supplies of domestic coal, and higher prices of imported coal. The companies claimed that the Union Cabinet's decision in 2013 to amend the Coal Distribution Policy allowing for lesser coal to be supplied by Coal India to each power plant, with the balance to be made up by imported coal, qualified for being considered as a 'change in law', thus allowing them to claim compensation.
The MERC agreed. "The issue is now not just about imported coal but also domestic coal supplies," says advocate Sanjay Sen. Under the framework decided by the Commission, the applicable compensation to Indiabulls is about Rs 193 crore while to Adani the compensation works out to '673 crore. This is still lower than the amounts that both companies claim will fully meet their losses. Jharkhand Integrated Power's Tilaiya UMPP (owned by Reliance Power) is claiming compensation for increases in project costs due to everything from the Rehabilitation and Resettlement Package for the land it acquired to increases in the price of diesel, and the exchange rate. There are a number of other cases in other states as well.
Says Kameswara Rao, leader of the energy, mining and utilities practice in PriceWaterhouse-Coopers: "In most international jurisdictions, fuel costs are passed through to utilities that buy the power. But the way capital costs are treated and the way exchange rate variations are treated may differ.
For example, there may be a prudence check by regulators. Or, in a competitive market the generating companies that made the wrong bets will end up taking the hit." He adds: "One must not judge these cases in isolation but in relation to alternatives. So tariffs of these projects, even with the compensatory adjustment, are more economical than similar upcoming new projects."
New model bid documents by the government now allow for fuel price pass-through, albeit incompletely. But even if fuel prices were fully passed on to customers, it hardly solves the problem, given that pretty much every cost input into a power supply contract is now up for renegotiation, going by the current crop of cases pending in various regulators across the country. This gives little incentive to states to issue competitive bids to procure electricity at all. There are more basic issues. For long, and often justifiably so, industry has criticised government for violating the sanctity of contracts. Now, the shoe is on the other foot.