Supreme Court pulls the plug on Tata, Adani power tariff relief

Earnings downgrade likely, order paves way for stricter power agreements

In a blow to Tata Power and Adani Power, the Supreme Court (SC) on Tuesday disallowed any relief to them in the five-year-old contentious issue of compensation to their respective power plants. 

The order sets a precedent for the power sector that consumers should not bear the cost of any change in international regulations. At the same time, the future of power plants using imported coal becomes bleaker.

The matter pertains to Tata Power’s 4,000-Mw Ultra Mega Power Plant and Adani Power’s 1,980-Mw plant at Mundra, based on imported coal, sourced from Indonesia.

The case was being fought between the two companies and the state utilities of Gujarat, Rajasthan, Maharashtra, Punjab and Haryana. The issue pertains to pass-through of the cost escalation because of changes in imported coal prices and regulations in the Indonesian coal market. In accordance with the directions of the Appellate Tribunal of Electricity (Aptel) and the SC, the Central Electricity Regulatory Commission (CERC) computed the relief for the two companies in a December 2016 order.

But the SC set aside the judgment of both Aptel and the CERC, quashing any relief. It has directed the CERC to “go into the matter afresh and determine what relief should be granted to those power generators who fall within Clause 13 of the PPA as has been held by us in this judgment”. 

Clause 13 of the power-purchase agreement pertains to change in regulations under Indian conditions. Tata and Adani were contesting for a change in rates under international regulations; thereby the judgment leaves very little room for relief for the two, said power sector experts.

Adani Power was expecting a compensatory relief of Rs  3,000 crore and Tata Power close to Rs 2,700 crore, said IDFC in its post-judgment analysis.

“It has come as a major negative surprise for the companies involved. However, all the cases pertaining to shortage of domestic coal will be eligible for compensation,” IDFC said. 

The Court has recognised change in regulations under Indian conditions, fuel charge included.

Sector experts said this was the end of the road for imported coal-based power projects in India unless the power purchase agreements allowed pass through of all variables linked to it such as international regulations, forex fluctuations and  transportation cost.

Reacting to the ruling, the stocks of Adani Power and Tata Power plunged 16.1 per cent and two per cent on Tuesday to close at Rs 37.20 and Rs 85.40, respectively. 

“The company is studying the final order. However, we would continue to work towards alternatives, including sourcing of competitive & alternative coals to best contain the onslaught of under-recovery,” Tata Power stated.

The order would also lead to a major earnings setback for both. Tata Power has been conservative in accounting for receivables under the compensatory tariff, and the future earnings starting from FY18 face a huge downgrade.

Adani Power, on the other hand, faces a huge earning write-off as its revenues already include the likely inflows of compensatory tariff, estimated at about Rs 9,000 crore. Analysts said the provisional compensatory tariff accounted by Adani Power was almost equal to the company’s net worth as on September 30, 2016.

However, in a communication to stock exchanges, Adani Power mentioned the company may benefit with respect to its power purchase agreements with Haryana, Maharashtra and Rajasthan. Analysts feel the benefit may be limited to the period when Adani Power procured coal from Indonesia to offset a shortage in India.

Analysts at JPMorgan say that had the order been in favour of Adani Power, the compensation could have been used to repay debt, interest liability could have come down by Rs 1,100 crore and net profit would have increased to Rs 480 crore. "These earnings assumptions would require significant reworking,” said analysts.

The analysts said failure to obtain tariff relief for the Mundra plant implies Rs 15 per share downside to its target price of Rs 90 for Tata Power. For Adani Power, they said a full retrospective recovery of compensatory tariff would be worth Rs 23 per share. 

Experts also said the projects might become unviable for both the companies. “The project was unviable from Day 1, given the risk of dependence on coal from Indonesia and foreign exchange fluctuation. But these aspects were discounted by the investors hoping a positive order,” said an analyst of a domestic brokerage.