 "Power lines struggle to draw private firms")
There's ample evidence to suggest that power producers for projects awarded through tariff-based bidding have erred in not recognising the unpredictability of fuel costs. In its April 7 order, the Appellate Tribunal for Electricity (Aptel), however, shut the doors on compensatory tariff as a way out for developers to address the increase in fuel costs.
For companies like Tata Power, Adani Power and a host of others that were hoping for a compensatory tariff mechanism, the order has added to uncertainty on power rates. The order says the Central Electricity Regulatory Commission (CERC) has no powers under Section 79(1) (b) of the Electricity Act to vary or modify the tariff or otherwise grant compensatory tariff to generating companies in case the tariff has been determined through a competitive bidding process in accordance with Section 63 of the Act. "This would be contrary to the entire scheme of the competitive bidding process," the Aptel order says.
Sudip Sural, senior director, Crisil Ratings, says the order will have a direct impact on generation companies for which variable costs are not a pass-through, as it restricts CERC from changing tariffs by going beyond the scope of PPAs. What the order has done is to establish the sanctity of PPAs in no uncertain terms. "The flexibility for revision in fuel component of tariff depends on the specific provisions of the relevant PPA with respect to pass-through of fuel costs," says Sural.
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Yet, the Aptel order has not been completely oblivious to the issue of fuel cost increase. By stating that the change in Indonesian coal laws, which affected the cost of fuel for many Indian power companies, be treated as force majeure, and by directing CERC to determine the extent of its impact on power companies within the next three months, Aptel has provided some relief to Tata Power and its subsidiary Coastal Gujarat Power.
No immediate boost
While in the near-term, it may not be of much help for the company, over the long-term, as Moody's Investors Service says, the order is going to be credit-positive for Tata Power as any compensation as a result of the Aptel order is expected to help the company trim its losses and in turn improve the ratings of the holding company.
Coastal Gujarat Power has been a drag on Tata power's revenues for a while now. According to a Moody's report, it accounted for 37 per cent of Tata Power's consolidated debt as of December 31, 2015. A large part of this debt is from Coastal Gujarat Power's 4,000-Mw ultra mega power project at Mundra in Gujarat. While the Mundra project made up for 44 per cent of Tata Power's total installed generation capacity of 9,156 Mw as of March this year, it also reported a net loss of Rs 8,900 crore in 2014-15.
"If the tariff revision based on Aptel's order were to fully compensate that (the increase in overseas coal prices), it should lead to 7-9 per cent increase in 2016-17 estimated EBIDTA (earnings before income, depreciation, taxes and amortisation) and its funds from operations/debt metrics improving to 9-10 per cent," says the report.
There is a lot riding for Tata Power on the Aptel order. Coastal Gujarat Power is in breach of its covenants relating to its maximum debt-to-equity ratio and minimum debt- service-coverage ratio, given the impairment booked on its assets and the reduced cash flows. It is in discussion with its lenders for waiver of these covenants, says the Moody's report. "Coastal Gujarat Power's performance, however, has been improving over the last few quarters with the decline in international coal prices and the company reversed 88 per cent of the impairment booked earlier in the quarterly results reported in December 2015."
The positive impact of the Aptel order might also be more visible on Tata Power than Adani Power. Unlike Adani, Tata Power did not take into its balance sheet revenues accruing from the compensatory tariff published by CERC based on the recommendations of a committee in November last year which has now been revoked by Aptel.
For Adani Power, which reported a loss of around Rs 380 crore from Mundra plant during April-December 2015, the benefit of increased tariff will now have to be discounted. The company reportedly took Rs 600-crore benefit on its books on the basis of the now-cancelled CERC order.
The consumer story
Consumers, though, have reasons to rejoice. By rejecting the power of CERC in fixing compensatory tariffs for PPAs under the tariff-based bidding process, Aptel has insulated them from frequent increase in electricity prices.
According to Kameswara Rao, partner, PricewaterhouseCoopers, consumers will face higher tariffs only for electricity from projects which have not been bid under the tariff-based model and where a provision has been made in the agreement for a pass through of fuel cost.
"The order makes a distinction between normal fuel price variation where contract terms permit pass-through, and unanticipated events for which a prior position could not have been taken," he says. "So, bidders who failed to take advantage of available provisions, would find it hard to make a case now," adds Rao.
Aptel's order can be appealed in the Supreme Court. Many believe there is a strong case for tariff revision for power companies. As Rao says, "It is important to recognise that profitable power companies are in consumer interest, as it helps attract capital at competitive rates." Clearly, the last word on the matter hasn't been heard yet.
