Adani Power: Long road ahead

Utilities may put up a fight against Adani's demand for 64 paise hike per unit from Haryana, Rs 1.11 from Gujarat

Following the Central Electricity Regulatory Commission's (CERC) order on "compensatory tariff" hike on Wednesday, state utilities will play hardball with Adani Power. The CERC has acknowledged that Adani Power is faced with hardships due to sharp escalation in prices of imported coal following regulatory changes in Indonesia. However, the authority has stayed away from recommending what the exact hike should be. Instead, it has ordered the constitution of a committee, which will comprise the company's chairman and state utilities, independent analysts and a reputed banker to arrive at this "compensatory tariff". The relief would only be temporary in nature.

Adani Power has informed CERC that the additional cost, only on account of additional usage of imported coal and "change in law" in Indonesia, for Haryana, is about 64 paise per unit in the year 2012-13 and for Gujarat about Rs 1.11 per unit in the first year based on exchange rate and coal prices as in August 2012. Analysts believe the two state electricity boards (SEBs) are unlikely to agree to such a sharp hike in tariff as they may have to absorb this hike and a pass-through may not be possible. With consumers refusing to pay bills in several parts of the country, the scope of litigation is high. Also, Haryana may not be willing to absorb the tariff hike. Consequently, the hike would have to be a middle path which would help Adani cover costs and yet not burden the SEBs too much.

It is unlikely that utilities will agree to a cost-plus-return model. Profitability of the company is not the concern of the utilities or the state governments. Analysts say the companies should have thought about such an exigency before it signed the power purchase agreements. The company has signed an agreement to supply power at Rs 2.34 a unit to Gujarat and Rs 2.95 a unit to Haryana. If the company continues to supply power from Mundra at these prices, its net worth will be eroded in two years.

While acknowledging that Adani Power is faced with hardships as the landed cost of coal from its Indonesian mines has risen, the CERC has come down heavily on the company for its assumptions on project costs and transmission losses. Clearly, neither did the company factor in any escalation in project cost nor did it anticipate any increase in the landed cost of coal from Indonesia over 25 years while signing the power purchase agreements. Analysts believe CERC has forced the petitioner (Adani Power) and the respondents in the case (Haryana and Gujarat SEBs) to sit across the negotiation table and arrive at a formula which will enable the company recover the cost of generation. A minority order passed by S Jayaraman has concluded that "the petition is a misuse of the process of the law and is liable to be dismissed."