Arguments heating up in Adani, Tata compensatory tariff cases

The outcome of the high-profile cases will be seen as a benchmark for contract renegotiation in infra investments

Two months after the Deepak Parekh panel gave its report on the contentious issue of compensatory tariffs for Adani and Tata-owned power projects in Gujarat, an early resolution to the dispute with procurers remains elusive.

The outcome of the high-profile cases will be seen as a benchmark for contract renegotiation in future infrastructure investments, arguments by the two sides in the recent hearings in the Central Electricity Regulatory Commission (CERC), however, indicate a protracted legal battle lies ahead.

The procuring states, which thus so far maintained their views had not been adequately reflected in the panel report, have raised questions on the basis and the extent of compensation, its effective date and the components of the compensatory rate.

In their affidavits submitted to the regulator in the Adani case, Gujarat and Haryana asserted the compensation should be applicable from the date of CERC’s final order in the case. This was rejected as “baseless” by the company’s counsel, who insisted the date of commercial operation declaration  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 the final order of commission is considered, the purpose of granting relief will be defeated,” Adani’s counsel argued. He added it is a settled position of law that compensation is paid from the date of cause of action.

The states also raised questions on the use of the Indonesian coal price benchmark, Harga Batubara Acuan (HBA), to calculate 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 issue being debated is whether the company should be compensated for the losses because of foreign exchange rate variation (FERV). The Haryana utilities argued that FERV should not be considered for calculation of compensation. According to the company, 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 asserted that both the Haryana and Gujarat bids were predominantly premised on domestic coal. Even the bid conditions did not allow quoting in dollar. However, 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 finalised 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.

The panel, headed by HDFC chairman Parekh, was set up to look into the issue of compensatory tariffs for imported coal- fired projects of Tata Power and Adani Power.