CERC RULING - LIGHTS UP POWER STOCKS

By Ruma Dubey

Adani Power has been a major gainer on the bourses since the beginning of this week. Earlier the buzz was that it would soon be allowed to hike its power tariff and yesterday, this murmur was confirmed. The Central Electricity Regulatory Commission (CERC) allowed a “compensatory tariff” for Adani Power’s imported-coal-based power project in Mundra, Gujarat.

Two key words here – “compensatory tariff” and “imported coal project”.

Compensatory tariff is with reference to the rising cost of imported coal mainly on account of change in regulatory norms in Indonesia for importing coal and also on account of lack of proper fuel linkages from Coal India. Due to this, companies have had to suffer. Adani Power for Q3FY13 had reported a higher consolidated net loss of Rs 619 crore, mainly due to higher imported coal prices and the poor fuel- linkages from Coal India.  The company, before notification of new Indonesian regulation was procuring coal at $36/tone and this, post the notification, rose to $92/tone and then it came down to $72/tonne. When Adani filed a petition with the CERC, it stated that it was suffering a loss of Rs.790 croere for supplying power to  Gujarat  and another Rs.580 crore for supplying to Haryana. Taking these facts into account, the statement of CERC thus means that it will compensate Adani.

In the statement issued by CERC, it has said that, “This  is a temporary phenomenon, and is likely to be stabilised after some time. Therefore, the petitioner needs to be compensated for the intervening period with a compensation package over and above the tariff discovered through the competitive bidding. The compensation package will be called compensatory tariff, and it could be variable in nature in proportion with the hardship that the company is suffering on account of the unforeseen events.”

So the compensation tariff would be calculated based on the loss (smartly coined as “hardship” by the CERC)  suffered by the company. Thus the question arises – who calculates the loss and what would be the method it will arrive at for allowing this tariff hike?  The CERC expects this to be a temporary occurrence and does that mean that the tariff hike will be linked to the imported price of coal, especially those emerging from Indonesia? Well, this compensatory tariff planned is for Adani alone, there is no change in law and it plans this on a case-to-case basis.

The CERC in its ruling specifically for Adani has said that it will set up a Compensatory Committee within a week which will include principal secretaries of power from Haryana and Gujarat, the MD of Urja Vikas Nigam and chiefs of distribution companies in Haryana, chairman of Adani Power or nominee, an independent financial analyst and an eminent banker. The Committee will then analyse the impact of the cost hike of Indonesian coal on the project viability and will obtain cost of imported coal from Indonesia, to be validated by independent auditors and based on this data, will suggest a package  for Adani, over and above the tariff in Power Purchase Agreement (PPA).

This ruling of CERC is specific to Adani but what about Tata Power? It too has a power unit at Mundra and it also sources it coal from Indonesia. After the new coal import regulations in Indonesia, it cost of imported caol went up to Ts.2/unit while it was selling power at Rs.2.45/unit. When Tata Power filed an appeal with CERC, it had asked for a 40 paise tariff hike  to break even and 65 paise hike for making reasonable returns.  Tata Power’s Mundra project for Q3FY13 reported a net loss at 830 crore.  But unlike Adani Power, Tata Power directly owns 30% stake in a coal mine in Indonesia. Thus the gains which it makes from the mines will be offset against the losses made in Mundra. This brings the question – while CERC has said that it will announce a decision for Tata Power plea in 10 days, we are not sure if CERC will also take into account the gains which it makes from the mines. And if it does, then the “compensatory tariff” for Tata Power might not give major returns.  But then, even in the case of Adani, its subsidiary owns 70% stake in the coal supplying company of Indonesia.

There is an appeal from Reliance Power too which has sought power tariff hike for its  Sasan ultra-mega power project in Madhya Pradesh and for its other UMPP at Krishnapatnam in Andhra Pradesh.

Well, the bottomline is that this ruling by CERC for Adani has sought to remove the malaise afflicting the sector presently. Adani has asked for a Rs.1.11/unit price hike from CERC for Gujarat electricity supply and this means consumers in the state will have to pay 20 paise more per unit. Thanks to the inefficiencies of Coal India, we the people of India will pay more for using power. Companies are also today victim of circumstances but the people are victims always, circumstances or no circumstances.