A worrying precedent

CERC order on Adani undermines tariff auction system

The power sector has for the past few years been hit by both good and bad news. The good news has long been that investment in capacity has apparently proceeded apace. About 20,500 megawatts of new generating capacity was set up in 2011-12, and the sector reportedly added another 17,500 MW in 2012-13. This is needed, of course, to keep up with the steep growth in power demand across India. However, the bad news has been considerable, as well - fuel has become scarce and expensive, causing many new investments to struggle to fulfil the contracts that they had entered into. This is the context in which another piece of news - both good and bad - has been received. And that is the order from the Central Electricity Regulatory Commission, or CERC, that essentially compensates Adani Power for its failure to anticipate fuel supply problems at its plant in Mundra in Gujarat. The company will be allowed to increase tariffs in a manner not anticipated at the time the project was bid out. This has already given hope to many other power-generating companies that have filed similar petitions seeking an increase in tariffs.

The CERC order has understandably been welcomed by power producers - after all, it allows them to make good the losses they would have had to incur were they to actually honour the contracts that they had signed. It may also be good news for all the power investment that had been stalled by developments such as the Indonesian coal price hike and coal import uncertainty. However, the order raises many worrying questions, as well. In particular, the sanctity of tariff-based bidding for power projects seems to have been undermined. What happens to those bidders who were edged out because they did not bid as aggressively as those who won the bids? Will this encourage power producers to bid more aggressively for future projects, in the hope that later they can get the tariff terms suitably modified if and when they land in trouble? Equally troublesome is what happens to the state utilities that had entered into power purchase agreements (PPAs). Given that they had offered consumers particular tariff plans based on these PPAs, wouldn't their fiscal planning be shot to pieces by such orders? Finally, the consumers too are hit - because, given the fiscal consolidation efforts and fiscal responsibility and budget management legislation in force, state governments are likely to allow the utilities to increase tariffs and end-users of power will bear the monetary burden of the change.

The long-term negative effects of this order can still be controlled. Attempts should be made to ensure that the committee that determines the compensatory mechanism follows a transparent mechanism, and the temporary nature of the relief is outlined. And the order has a natural consequence: if fuel price increases can allow power producers to plead for a tariff cut after a PPA has been signed, the reverse too should be true. In other words, when feedstock prices go down, producers should be made to reduce tariffs using the same principle. Either way, it is important to prevent any lengthy legal wrangle over these issues, since power investment and power generation are both critical to India's growth revival.