Arguments heating up in Adani and Tata compensatory tariff cases

Early resolution with procurers remains elusive

More than two months after HDFC Chairman Deepak Parekh-headed panel submitted its report on the contentious issue of compensatory tariffs for Adani and Tata-owned power projects in Gujarat, an early resolution for the dispute with procurers remains elusive.

The arguments by the two sides in the recent hearings in the Central Electricity Regulatory Commission (CERC) only appear to be heating up, indicating the cases are headed for a protracted legal battle, even as the outcome of the high-profile cases will be seen as a benchmark for contract renegotiation in future infrastructure investments.

The procuring states, which had so far claimed that their views have not been adequately reflected in the panel report, have now gone a step ahead to raise questions over the basis and the extent of compensation, its effective date and the components of the compensatory tariff.

In their recent affidavit submitted to the regulator in the Adani case, Gujarat and Haryana asserted that the compensation should be applicable from the date of final order of the commission in the case – a standpoint rejected as “baseless” by the company’s advocate, who insisted that the date of commercial operation declaration (COD) should be considered.

“The committee has recommended the recovery of historical losses from COD by prescribing the fuel adjustment formula as compensatory tariff. If the date of final order of commission is considered, the purpose of granting relief will be defeated,” Adani’s counsel argued. He added that it is a settled position of the law that compensation is paid from the date of cause of action.

The states also raised questions over the use of the Indonesian coal price benchmark, Harga Batubara Acuan (HBA), for calculation of the pricing of imported coal used by the company. Indonesian coal cannot be sourced at a price lower than the HBA. Adani’s counsel argued that HBA is the appropriate index as coal for the project is sourced from Indonesia and also because the current CERC escalation rates for imported coal do not take into account HBA.

Another major issue being debated is whether the company should be compensated for the losses on account of foreign exchange rate variation (FERV). The Haryana utilities have argued that FERV should not be considered for calculation of compensation. The company, however, argues that FERV is a key component of the fuel charge of the tariff.

“The cushion available to absorb forex fluctuation has been consumed by change in coal prices and the change in the source of coal,” Adani’s counsel argued.

He also asserted that both the Haryana and Gujarat bids were predominantly premised on domestic coal. Even the bid conditions did not allow quoting in dollar. But due to change in the post-bid circumstances, the company was forced to shift to imported coal. The escalation in coal prices and the weakening Rupee value later worsened the situation. He also invoked the draft of the bidding documents being finalized by the power ministry which provide for passing on forex risk to procurers.

The regulator asked the company whether the petition would still have been filed if the imported coal price had remained unchanged but forex variation had occurred. To this, the company’s counsel replied that a petition of a different nature would have been filed in that case.