The Central Electricity Regulatory Commission's latest ruling for Reliance Power's 4,000 Mw Ultra Mega Power Plant (UMPP) at Sasan in Madhya Pradesh sets a poor precedent for private participation in infrastructure projects. By allowing the Sasan plant to charge buyers a higher tariff to recover Rs 571 crore under a "change in law" clause in the Power Purchase Agreement (PPA), it also raises questions about the unrealistically low tariff bids that private companies put in to win projects, only to repudiate them when inevitable cost pressures occur. "Change of law" provisions are a standard hedge in commercial contracts - but the point of contention here is one of interpretation. Can something as common as excise duty changes be deemed a change in law sufficiently significant to warrant a deviation from a committed tariff?
The crux of the issue is an increase in duty rates from two paise a unit to five paise by the Madhya Pradesh government in April 2012 under a new Electricity Duty Act. Under the same law, the electricity duty on auxiliary power consumed by a generating company was raised from eight per cent of the distributing company's tariff to 15 per cent. In 2013, the state government passed another law requiring generating companies to pay an energy development cess to the state government at 15 paise a unit. The CERC ruling is far-reaching: it not only allows Sasan to recover a one-time compensation till July 2015, but also a seven per cent increase per unit over the 25-year term of the PPA. Excise and cess are dynamic revenue tools for governments and are prone to fluctuation, just like exchange rates. By establishing it as a principle of "change in law", the CERC has opened the door for other power producers to do the same - just when the state-owned power procurers' financial stability is in grave doubt (Sasan sells power to seven states).
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The issue raises once again the uncritical acceptance of unsustainable bids by the private sector for large public utility projects. In the euphoria surrounding private investment in infrastructure in the early years of the United Progressive Alliance government, such commercial showboating was considered a sign of confidence in the "India story". Reliance Power was awarded the Sasan project by virtue of an aggressive levelised tariff of Rs 1.196 per unit over 25 years, rates that were deemed unrealistically low even then. Nor was Sasan the only one. Tata Power won the UMPP at Mundra in Gujarat, offering a similarly low tariff bid of Rs 2.26 a unit, only to demand a revision when the price of imported Indonesian coal, on which the project was predicated, was raised sharply (notably, tariffs are not being cut now that coal prices have nose-dived worldwide). Instead of scrambling to keep poorly designed projects going through legal alibis, companies that are unable to stick by bid promises should be subjected to strict scrutiny, with provisions for financial penalty for those failing to establish a rationale for their bids. This will force bidding discipline and ensure the sustainability of infrastructure projects.
Not questionable, says Sasan Power
Reliance Power Limited, in response to this editorial comment, has stated that the relief provided by the Central Electricity Regulatory Commission to its subsidiary, Sasan Ultra Mega Power Project, is on the basis of a true and correct interpretation of the provisions under the power purchasing agreement (PPA), which allows tariff changes as "Change in Law" events.
The company has stated that it did not use any legal alibi. It claimed what it was rightfully and legitimately entitled to under the PPA. In any case, the relief granted by the regulator is on account of the enactment of a new law passed by the Madhya Pradesh government, which qualifies as a change in law. The cess accounts for about 65 per cent of the relief granted to the Sasan project and the imposition of the cess on the sale of power is unique to the state of Madhya Pradesh. Hence, the excise duty change and the cess are not dynamic tools prone to fluctuation, the company has stated.
It also said that it did not make any low-tariff bids. Its competitive bid submitted had nothing to do with the reliefs provided and any other bidder or developer facing a similar situation would have been provided identical relief. There had been no attempt on the part of the company to repudiate the contract due to any cost pressures, it added.
The company said it has passed on Rs 22 crore per year to power procurers on account of electricity duty reduction. The company runs the Sasan project at a plant load factor of 95 per cent on a tariff of Rs 1.4 per Kwh, which, even after the relief, is substantially lower than the tariff of any other thermal power project in the country.
We take note of these statements and stand corrected.