Tata, Adani can't charge compensatory tariff: Supreme Court

NEW DELHI | MUMBAI: The Supreme Court said power companies can’t raise preset tariffs if fuel becomes costlier due to changes in laws overseas, setting aside rulings by regulators and dealing a blow to Tata Power and Adani Power. The court asked the electricity regulator to consider the matter afresh keeping in mind the government’s revised coal allotment and power tariff guidelines.

Tata Power and Adani Power have been embroiled in a long-running dispute with state-run distribution companies over charging more for electricity after Indonesian coal supplies became costlier. The decision threatens the viability of the Tata and Adani power projects that use the fuel and could dent the overall earnings of the companies. Both stocks fell, with Adani Power tumbling 16%.

The two companies had wanted to pass on the difference after the Indonesian government issued new regulations in 2010 that raised the price of coal.


The court ruling came as a surprise as the Central Electricity Regulatory Commission (CERC) had ruled in 2013 that both companies could claim a higher tariff to compensate for the increase in coal prices. The Appellate Tribunal for Electricity (APTEL) had upheld this last year. The two-judge bench set aside the APTEL and CERC rulings.

At the time of seeking compensatory tariff, Tata Power had said without that its Mundra project would incur an annual loss of Rs 1,873 crore, resulting in a cumulative loss ofRs 47,500 crore over the 25-year supply period. With coal prices dropping, the project is now making losses ofRs 900 crore a year, Tata Power said. Adani Power had already includedRs 9,000 crore in revenue based on likely earnings due on the compensatory tariff and will now have to write this off.

Adani Power closed at Rs 37.20 on the BSE on earnings concerns stemming from the court ruling. Tata Power closed at Rs 85.40, down 2%. “The company would decide the further course of action once the final order of the Supreme Court is available and keep all stakeholders informed,” Adani Power said in a statement.

Tata Power did not comment on the development as it hadn’t received the order. In an ET interview on Tuesday, MD Anil Sardana had said Mundra was the only laggard in the company’s portfolio and that it was hopeful of a favourable court verdict. Still, experts said the companies could argue for similar reliefs on fresh grounds — the government’s revised coal allotment and tariff norms.

On Tuesday, the court said companies cannot claim any benefit under the force majeure or sudden unforeseen event clause as “changes in the cost of fuel, or the agreement becoming onerous to perform, are not treated as force majeure events under the PPA (power purchase agreement) itself… It is clear that the definition of ‘law’ speaks of all laws including electricity laws in force in India. Electricity laws, as has been seen from the definition, means the Electricity Act, rules and regulations made thereunder from time to time, and any other law pertaining to electricity”.

Adani Power said based on the preliminary analysis it stands to benefit on its power purchase agreement for 1,424 mw with Haryana, 3,300 mw with Maharashtra and 1,200 mw with Rajasthan discoms.

HIKE IN TARIFFS
CERC had allowed Coastal Gujarat Power, the Tata Power subsidiary that runs the 4,000 mw ultra mega power project, a 52 paise per unit compensatory tariff. Adani Power’s 1,980 mw plant was allowed to raise power tariffs by 41 paise per unit in view of the steep increase in Indonesian coal prices. The companies had argued that since imported coal was a major portion of their raw material, the cost escalation had made it impossible to continue their 25-year power purchase agreements (PPAs) with states such as Punjab, Haryana, Rajasthan, Maharashtra and Gujarat.

Adani Power and Tata Power had sought CERC’s nod to charge higher compensatory tariffs citing “force majeure” and “change of law” clauses. CERC, while rejecting their claim to invoke these clauses, set up a committee to examine their claims. The committee ruled in their favour in 2014. APTEL upheld this in 2016. Two NGOs and several state-owned power distribution companies challenged the APTEL decision in the top court on the ground that power producers cannot be allowed to charge higher compensatory tariffs for changes in import prices of coal, arisk inherent to the business.

The PPAs had been arrived at on the basis of competitive bidding and cannot be changed later, they contended. PPA holders cannot wriggle out of long-term contractual agreements, they argued. In a report last month, brokerage JPMorgan said Tata Power shares would take a hit of Rs 15 from a price target of Rs 90 if the compensatory tariff was disallowed. The report also said Adani Power shares had already factored in the best relief possible on tariffs and pegged the full retrospective recovery of the compensatory tariff at Rs 23 per share.

Tata Power is in a pact to sell power from its 4,000 mw UMPP at Rs 2.35 to five states. While Adani Power’s 4,620 mw unit is in a pact to sell 1,000 mw at Rs 2.35 a unit, another 1,000 mw at Rs 2.89 to Gujarat and is also in pact to sell power to Haryana at Rs 2.94 per unit.