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.
Critical Comments
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.
Broader Issues
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.
Source- ET
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.
Critical Comments
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.
Broader Issues
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.
Source- ET
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