CERC to R-Power: High diesel cost at Sasan your problem

Diesel used to run mining equipment in the captive coal blocks linked to its flagship Project in Madhya Pradesh

The Central Electricity Regulatory Commission (CERC) has denied Reliance Power (R-Power) the compensation it had sought for the high cost of diesel used to run mining equipment in the captive coal blocks linked to its flagship Sasan Ultra Mega Power Project in Madhya Pradesh.

The company had petitioned CERC last year, invoking the ‘Change in Law’ clause of the power purchase agreement (PPA). It argued the government’s January 2013 decision on decontrol of diesel prices had pushed up operating costs by an unforeseen Rs 133 crore annually. The argument failed to cut ice with the regulator. “None of the conditions for a matter to be considered as Change in Law are satisfied,” says its order, adding there was no escalation component for diesel price variation attached to the bid price.

Reliance Power was issued the Letter of Intent (LoI) for the Sasan UMPP in August 2007. The company signed PPAs with 14 state distribution companies the same month. Mining equipment consumed over 59,000 Kilo Letre of diesel per annum at three of the mines attached to the project.

The company said in its petition that the Administered Pricing Mechanism (APM) for diesel was discontinued in 2002 on paper but remained applicable in spirit. Therefore, the price of diesel continued to remain subsidized. But, the subsidy on diesel was removed for bulk consumers in January 2013 leading to the extra expenditure on fuel.

CERC said that the policy to dismantle APM and market-linked pricing of diesel was in existence before August 2007 when the project was bid. It added the argument that the government continued to determine retail prices of petroleum products is not tenable as the market was deregulated in 2002 and the private players were free to charge as per their discretion.

In a separate order issued on Friday, CERC asked the company to submit information on the project including date of bid, assumptions for bid of Rs 1.19 per unit, increase in project cost, savings due to purchase of equipment from China and the Return on Equity (RoE) envisaged. The order was passed on a different petition seeking "economic restitution" due to rupee depreciation.

“Reliance Power welcomes the CERC order recognizing the unprecedented and unforeseen foreign exchange rate variations beyond the control of the company and beyond normal expectations may need to be considered for quantification and compensation by the procurers appropriately,” a company spokesperson said.

CERC had noted that the rate quoted by the company is the lowest among all supercritical power projects and that there may be a case for procurers to share a part of the burden on account of Rupee depreciation considering the extremely competitive rate at which the procurers are getting power.

Rupee slide compensation
In a separate order on Friday, CERC asked the company to file information on the project — date of bid, assumptions for a bid of Rs 1.19 a unit, increase in project cost, savings due to purchase of equipment from China and the return on equity envisaged. The order was passed on a different petition, seeking “economic restitution” due to rupee depreciation.