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JUN 12 2013

If UP can raise power tariff substantially, so can others

  • Economic Times, ET Bureau / Hyderabad
  • Created: Wed 12th JUN 2013

With the usage of imported coal increasing in electricity generation, the domestic power sector faces serious challenges in terms of allowing fuel cost pass-through. The governments proposal to nearly double the price of domestic natural gas does not augur well for the sector either. With electricity boards financially bankrupt and consumers paying capacity limited, rising fuel costs threaten power industrys viability. Former chairman, CERC, Pramod Deo discussed these challenges and some recent regulatory decisions in an interview with Noor Mohammad.

You have allowed pass-through of additional fuel costs in Tata Powers and Adani Powers cases recently. This was a case of reopening a concluded contract and arguably could set a bad precedence.

Your comments.

In our self-contained order, the reasons for the decision are given. And mind you, what we have done is exercise our broader regulatory power. We have weighed a whole gamut of factors and the interests of all stakeholdersincluding the investors and the consumersbesides that of the countrys energy sector as a whole.

As for the two decisions you have referred to, there were some legal aspects that we had to cope with. One was whether to allow "change in law, a question which inherently encompassed (the question of) change in international law. Another was the applicability of force majeure condition. We have concluded that events concerning imported coal were not covered under the force majeure in both the cases. But we also recognised when the winning bidder was not in a position to envisage the conditions that had eventually emergedin this case the increase in imported coal price because of the policy change effected by Indonesiawe could use our broader regulatory power.

What we have allowed in the two cases is some kind of compensatory tariff and we suggested that a committee be formed to work this out. The proposed compensatory tariff would be dynamic in nature, meaning if the price of imported coal comes down (it already has) in the future, the tariff could get adjusted too. You can also have a situation where the coal price comes down so much that the developer has to recompense the buyers of power.

We havent gone into tariff determination, which had already been done through competitive bidding. It is up to the parties (discoms in Gujarat and Haryana in the Adani Power case) to sit together and finalise the numbers. We also suggested that the impact of compensatory tariff on the consumers should be reduced to the minimum. So, to the extent possible, profits from Adanis coal mine venture should be shared with the groups power company concerned.

In a dissent order, one of the CERC members questioned the tenability of Adani Power wanting the PPA parties (Gujarat and Haryana discoms) to bear the extra coal import bill attributable to the difference in the rupee-dollar exchange rate after 2007. What do you have to say on this?

We simply do not comment on our orders, particularly when there is a dissent order. You have to make your assumptions from the reasons given in the order. And it was anyway a composite, majority order. We have said that there should be reputed bankers and financial analysts on the committees working out the compensatory tariff so that all the numbers that are given by the companies could be verified.

There is a demand to double gas price as per the Rangarajan committees recommendation. Given that state electricity boards (SEBs) need a bail-out package due to their inability to revise tariffs in a timely manner even with lower fuel prices, how feasible is the idea of fuel cost pass-through in the power sector in the changed situation?

When coal linkage was allocated, it was the understanding that power companies would be given coal to run plants at 80% plant load factor (PLF). Since Coal India is not able to produce enough coal, there is going to be a shortfall. Now they will substitute that with imported coal, which is costlier. On pooling of coal costs, there is opposition from states who have their own coal resources. Suppose someone went for competitive bidding taking CILs commitment into account, they took price fluctuation into account. But there are two components of chargesescalable and non-escalable. Now the question is how do you advise state electricity regulatory commissions. One option could be to modify competitive bidding guidelines in the short term. We have advised that in the long term it should be done by amending electricity policy and tariff policy. When it comes to imported coal, we have not accepted the force majeure argument. But when it comes to domestic coal, we accepted it because CIL had made the commitment.

Recently, Uttar Pradesh increased electricity tariff substantially. If UP can do that, there is no question why other states cannot. The power ministry is contemplating a lawstate electricity distribution responsibility Bill along the lines of the FRBM Actwhich will mandate recovery of costs by SEBs.

There has been talk of reforms required in the distribution sector to bring in competition so that consumers should have the freedom to choose between various suppliers. Do you think these reforms can be implemented in the near future?

The Electricity Act talks of open access to introduce competition. But that is not happening because consumers who are in a position to go for open access are really sustaining the utility. They are paying, subsiding consumers and so there is resistance to open access. In Maharashtra, for example, there are 2,000 industrial and commercial consumers who account for 71% of electricity consumption. If those consumers go away, what will happen to the SEB? Some 30-35% electricity consumed in the agriculture sector is not metered. Then there is the issue of cross-subsidy which cannot be wished away.

What were two main achievements of your tenure in terms of electricity market regulations?

The most important thing is that we made it possible for an inter-state generating company to sell power anywhere in the country. Second, when capacities were being added, transmission highways were needed. We granted regulatory approval to Power Grid to build transmission network. Then we also introduced the concept of medium-term (three years) open access for the transmission networks. Earlier there was short-term and long-term open access for transmission networks. In between, there was nothing. For example, a generating company can get a lot of operational flexibility if it enters into a medium open access agreement with Power Grid for use of transmission capacity.

Then we also started moving toward point of connection charges. The advantage is that it is based on zonal charges and the direction of power flow. Before that, we had the postal model which offered little flexibility to generators.

Earlier, there was much too reliance on the unscheduled interchange (UI) route which had become a trading mechanism. We have tightened our frequency regulations and plan to further tighten them so that discoms plan their power procurement rather than rely on the UI route.


Haryana Uttar Pradesh Gujarat Maharashtra Adani Power Ltd Power Grid Grid Carbon Emission Reduction Central Electricity Regulatory Commission Coal Coal India Limited Electricity Act Indonesia State Electricity Board Prospecting Licence CIL Power Tata Power Electricity India

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