AP may seek Centre's intervention

GAIL fails to honour its commitment on gas supply to power projects

With there being little possibility of producing any additional gas in the Krishna Godavari Basin (KG Basin) before mid-2008, the Andhra Pradesh government is now planning to take GAIL and ONGC to task for not honouring their commitment on gas supply to the four new power projects in the state.

The state government is expected to seek the Centre's intervention in this regard. Chief Minister Y S Rajasekhara Reddy has decided to meet Prime Minister Manmohan Singh and may urge the Centre to share the burden of fixed cost payments till the gas is available for these projects.

The four gas-based private projects "� Gautami Power (464 mw), Konaseema EPS Oakwell (445 mw), Vemagiri (370 mw) and GVK Industries (230 mw) "� were originally scheduled to be commissioned between 2005 and 2007.

For this, the companies had got approval from the Andhra Pradesh Electricity Regulatory Commission (APERC) a couple of days before the new Electricity Act was promulgated in June 2003, basing on the firm allocation of natural gas and supply commitment given by a committee led by petroleum ministry based on GAIL's projections.

APTransco, the state power utility, subsequently signed power purchase agreements (PPAs) with them.

Thinking that the delay in producing additional gas in KG Basin was just for a few months, Reddy, soon after coming to power, held talks with the IPPs of the four new projects and convinced them to slightly postpone their construction schedules. He also asked them not to invoke alternate fuel clause available in the PPAs till December 2006.

Even the production plans of Reliance, which were originally slated during the year 2007, have now been extended till mid 2008. However, even that may also be delayed by a few months, according to the indications received by the state government from Reliance.

As things proved otherwise and the only hope for additional gas availability, which came in the form of Reliance, is still faraway, the state government is now looking for ways to force GAIL to share the risk besides seeking an intervention by the state electricity regulator (APERC) in the matter.

"Reddy is planning to meet Manmohan Singh and discuss exclusively on the issue of non-compliance of GAIL on its commitment on gas supply to these projects and may also urge the Centre to share the burden till additional gas is available for power generation," a senior government official told Business Standard.

"It is a fact that the state government signed PPAs primarily on the basis of GAIL's commitment on supply of gas to these projects and subsequent risk for not keeping the promise should only go to thegas suppliers," he argued, echoing the sentiment of the government.

But there is no such clause in the fuel supply agreement that can legally bind GAIL for the delay.

As per the PPA signed by the producers with the state, the government would have to pay close to Re 1 per unit on their generation capacity as fixed cost in case APTransco asks them not to generate power.

This would mean a payment of close to Rs 100 core towards fixed costs from the date of announcement of commercial production to the IPPs every month without even purchasing a single unit from them.

IPPs have already tied up with equipment suppliers and lending institutions and are in no position to bear any further delay as this would result in huge interest burden.

While PPAs will provide legal safeguards in the face of any default from the government, IPPs are still worried over the possible intervention from the APERC on the APTransco's petition seeking a permanent relief from the alternate fuel clause. Their fears are not without a basis either.

"The regulator in the past had issued orders on the PPA with the BSES stating that APTransco will have to pay the power costs limiting only to the cost of gas even if the company runs the plant with naphtha. Similar instructions could be issued in the present case too," said the senior official, indicating what's in store for IPPs.

Naphtha-based power is expected to cost Rs 7 per unit as compared to over Rs 2.50 in case of gas fuel.