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Shares of several private power producers rallied on Monday, following the weekend order from the Central Electricity Regulatory Commission (CERC) for a compensatory rate of 54.5paise a unit for Tata Power’s Ultra Mega Power Project (UMPP) at Mundra, Gujarat.
However, the BSE Power Index was down 1.5 per cent, as heavyweight NTPC was weighed down by a negative ruling in a different case. It was also as if reality had prevailed after the initial euphoria, since Tata will have to go through several legal battles before it can take this ruling for granted. States and distribution companies faced with now having to raise their rates are sure to contest the issue in the courts.
And, CERC has also made itself open to renegotiating the terms of several other long-term power purchase agreements (PPAs). In fact, legal experts are questioning the validity of such contracts after the ruling, in this and other sectors. The purpose of inviting PPA bids was to get the government or regulator out of the process of price determination; competitive bidding was meant to get the best price for consumers. By redoing the contract, CERC has entered the domain of pricing again, by delving into input cost issues.
Sonam H Udasi, senior vice-president, IDBI Capital (institutional equities), says: “CERC is a government-nominated body, which has come out with a favourable order for Tata Power and Adani Power. The announcement is certainly positive in the short term for investors. But the government has opened a Pandora’s Box with regard to the sanctity of existing PPAs. Anybody who thinks he has been short-changed will come to the regulator for an increase in tariff (rate).”
A barrage of companies will now queue to renegotiate their PPAs. Reliance Power has already approached CERC to renegotiate its own UMPP at Sasan (Madhya Pradesh), citing expensive foreign currency borrowings and the rupee’s fall. By setting a precedent and giving a compensatory rate rise, CERC has opened itself for similar leniency. One lawyer asks, “How can the regulator not give in to such demands from other companies?”
The idea of long-term contracts is that they are supposed to factor in such exigencies and then quote a price. Typically, long-term contracts do not have clauses which enable a contractor to go back and renegotiate. Som Mandal, managing partner at Fox Mandal Little, says: "CERC has set a precedent and a whole host of long-term contracts, not only in the power sector, will now come for renegotiation. While this can happen if the two parties are willing, it is not a good thing for long-term contracts. Ideally, the government/regulator should have stuck to the stipulated contracts.” States which are coal-rich have been contesting any request for a rate rise. This ruling could lead to public interest litigation and if that were to happen, not only would power stocks fall but it would lead to further complexity for the sector.
Yet, for those questioning the CERC’s decision, there are also others who say it was the correct thing to do. Manish Sonthalia, head of equities, PMS, at Motilal Oswal Asset Management Co, says: “The major issue being questioned by CERC is the force majeure clause (getting absolved from contract obligations for reasons beyond on’es control). Under this, I don’t think the order can be challenged in the higher courts. The price of coal has undergone a change since the PPA was signed. CERC has made it clear that each case will be judged on a case to case basis. So, a power producer may go to the CERC but it will depend on whether the proposal will be accepted or not.”
