Curbing the power of regulation

The power regulator and the sector can learn from a 5-year legal battle and an order by the Appellate Tribunal for Electricity

April 7 started off on a bad note for India's leading power companies - Tata, Adani, Reliance, GMR and GVK. One wrong newsflash on a legal case and their stocks came crashing down. While Tata Power and Adani Power were direct parties to the case, others suffered in anticipation.

This reflects how critical a technical case hearing in the Appellate Tribunal for Electricity (Aptel) could be for the fortunes of power majors. Though it was clarified later that the decision was positive, it had little effect on the stock.

The case related to the payment of compensatory tariff to Tata Power's 4,000-Mw ultra mega power project and Adani Power's 1,980-Mw project - both in Mundra, Gujarat. The case, going on since 2011, concluded with Aptel asking the Central Electricity Regulatory Commission (CERC) to decide tariff according to the power purchase agreement (PPA) and under the clause of 'force majeure' (unforeseeable circumstances).

KEY TAKEAWAYS FROM THE APTEL ORDER

• CERC to compute compensatory tariff according to the PPA terms
   
• Force majeure to be the guiding principle in such disputes. Change in law to be cited only for Indian companies
   
• Aptel quashes special regulatory powers of CERC under Section 79 of the Electricity Act
   
• Sets precedence for the sector, setback for the regulator

Adani's project was commissioned in 2008 and Tata's in 2012. Both were importing coal from Indonesia, and had bid accordingly. Coastal Gujarat Power Limited (Tata Power's special purpose vehicle) has a PPA with distribution companies in Gujarat, Rajasthan, Maharashtra, Punjab and Haryana were to sell power at Rs 2.26 a unit. The PPA of Adani was with utilities in Gujarat and Haryana at Rs 2.35 per unit.

In 2010, Indonesia changed its coal benchmark price, which led to cost escalation. Tata and Adani filed a petition with the CERC in 2012, stating, "this should pass-through under 'change of law' and 'force majeure." The CERC quashed 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, it fixed the compensatory tariff at 52 paise per unit for Tata and 41 paise for Adani.

The power procurers moved Aptel, contesting the decision. Aptel upheld the decision in July 2014, allowing the two to charge higher tariffs from March 2014. The procurers, then, approached the Supreme Court. GMR, GVK and Reliance Power, which were looking at a similar relief due to the change in coal prices, joined the case.

In what the sector hailed as a "balanced decision", the tribunal directed the commission to assess the extent of impact of force majeure, in its 486-page judgment. It asked it to "give them (Tata and Adani) such relief as maybe available to them under their respective PPAs and in the light of this judgment after hearing the parties." The CERC has to deliver its order in three months.

Though Aptel has upheld force majeure, it had restricted the change in law provision for Indian markets. This ended the confusion for those power producers sourcing fuel domestically.

The tribunal had also struck down the regulatory powers of the Central Electricity Regulatory Commission saying, "The central commission has no regulatory powers under Section 79(1) (b) of the said 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."

The tribunal had cleared the air that Section 63 was a self-contained code and cannot be tinkered with, said an analyst. "Any dispute arising out of unforeseen events is to be dealt with according to the PPA," he said.

The CERC refused to come on record and said it was assessing the Aptel order. Sources close to the development said a decision based on the PPA can swing the needle to either side.

The Aptel judgment evaluates the pros and cons of force majeure. It said the case fell under circumstances not in control of power generators but then the PPA was also noted to mention, "generators shall use its reasonable efforts to mitigate the effect of any event of Force Majeure as soon as practicable."

"In such a situation, the relief available in the PPA can be granted to the generators, on the ground that their case falls in force majeure," said the tribunal. Its definition of 'make it difficult' and 'hindrance' as result of force majeure would have to be read carefully by the commission, said an expert.

"The law is clear now that the CERC has no power to set terms of tariff and it can only approve the tariff as per terms of the PPA," said Shailendra Singh, managing associate - infrastructure & projects, Advaita Legal.

He said Section 61, along with 64 of the Electricity Act, gave CERC the power to open PPAs, but then Section 63 was sanctimonious.

Questions marks, however, remain over CERC's special regulatory powers. "This is the third consecutive case wherein the tribunal has put special regulatory power of the CERC in the dock," noted a legal expert, closely following the case.

Aptel had questioned this recently in a judgment regarding Reliance Power's Sasan UMPP.