Imported coal projects: Six years on, it's back to CERC for Tata & Adani

After six long years, SC has referred the case for adding the escalated cost of Indonesian coal to the power tariff back to the CERC, even as the projects by the two companies struggle to stay afloat

It’s been six years that the imported coal power projects in Gujarat –– especially those of Tata Power and Adani Power -- have been fighting a regulatory battle in their bid to add the escalated cost of imported coal to the final power rate. And for the past six years, they have been coming back to the same place – the Central Electricity Regulatory Commission (CERC), which would be taking a decision on the issue for the third time.

It was first in 2012 that Tata and Adani Power sought relief from CERC on the issue of escalation in the price of imported coal. The Indonesian energy regulations changed that country's coal benchmark price in 2010 which lead to a cost escalation. Tata’s 4,000-Mw ultra mega power plant and Adani’s 1,980-Mw power unit, which import coal from Indonesia, asked the CERC to award compensatory tariff arising out of increased cost of coal.

“This should be a pass-through under ‘change of law’ and ‘force majeure”, Tata and Adani had said in their petition to the CERC in 2012. The projects of both the groups were based on a static coal cost for 25 years.

CERC quashed the 'force majeure' and 'change of law', and invoked special regulatory powers for itself under Section 79(1) of the Electricity Act, to compute compensatory tariff. In February 2014, CERC came out with compensatory tariff of 52 paise per unit for Tata and 41 paise for Adani.

That marked the beginning of woes for the two companies and others, which became party to the case involving “compensatory tariff.”

The states that were procuring power -– Gujarat, Rajasthan, Maharashtra, Punjab & Haryana -- moved the Appellate Tribunal of Electricity (APTEL), contesting the escalation in the cost of power. APTEL upheld the CERC’s decision, allowing Tata Power and Adani Power to charge higher tariffs from state utilities on account of a rise in the cost of imported fuel.

Procurers along with consumer rights groups moved the Supreme Court, which asked APTEL to resolve the matter expeditiously after hearing all stakeholders involved. In March 2016, APTEL issued a 486-page judgement asking CERC to compute the compensation for Tata & Adani as per the provisions under their respective power purchase agreements (PPAs).

This is the same order in which APTEL struck down CERC's regulatory powers and said, “the Central Commission has no regulatory powers under Section 79(1) (b) of the Electricity Act to vary or modify the tariff or otherwise grant compensatory tariff to the generating companies in case of a tariff determined under a tariff-based competitive bid process, as per Section 63 of the said Act.” Section 63 pertains to competitive bidding and PPA. APTEL upheld ‘force majeure’ but restricted ‘change in law’ provision only to Indian markets.

In December 2016, CERC allowed the power companies compensation for the increased cost of coal from the procurers. It didn’t stipulate the quantum of relief, but left it for the SC to decide. 

The cheer lasted few months. The SC in April 2017 denied any compensatory tariff to the two power companies. It also directed CERC to “go into the matter afresh and determine what relief should be granted to those power generators who fall within clause 13 of the PPA as has been held by us in this judgment.” Clause 13 of power purchase agreement pertains to 'change in law' under Indian conditions. Tata and Adani were contesting for 'change in law' with regard to international regulations.

Meanwhile the Gujarat government formed a high-powered committee (HPC) to formulate a relief plan for the imported coal-based plants in its territory, the lenders and the consumers.

“These units need to be salvaged and should be permitted to pass through the impact of high fuel costs equitably to consumers, lenders and other stakeholders,” the HPC report recommended. It asked for cost sharing among lenders, producers and consumers. It also suggested a cap of $120 a metric tonne on the cost of coal that can be passed on to the customer.

Gujarat recently moved the Supreme Court to direct CERC to allow the recommendations of the HPC. The SC has thrown the ball back at CERC to look at PPAs signed by various states with Tata, Essar and Adani power projects afresh. It has asked CERC to take a view under Section 79 (b) of the Electricity Act, 2003 that allows the Commission to regulate tariffs on the sale of power to more than one state under a composite scheme.

The CERC could, as some would say, have the last laugh. The same section which it used for computing relief in 2012 and for which it was dwarfed by APTEL, is now being suggested by the SC to resolve the matter.

However, it is no laughing matter for the power companies. Apart from Gujarat, no other state has agreed to the revised tariff suggested by the HPC. At the same time, energy rights groups have also protested against any tariff hike, citing “crony capitalism and consumer rights”. Tata, Adani and Essar’s imported coal-powered units are on verge of becoming NPAs. 

CERC will hear the arguments again. But the catch is that the PPAs of Tata and Adani do not allow any pass through of international changes in law. The Supreme Court had, in 2017, asked whether these power companies, “were they bidding with closed eyes”, that they could not envisage any change in coal cost. 

The Gujarat government seems bent on salvaging these units as it seeks to meet high power demand by accessing power from these units, which would be cheaper even after escalation.

This means that the fight is far from over. As more than two dozen power units stand on the verge of insolvency, Tata and Adani await a suitable order to escape that eventuality, after half a decade of operational losses.