Paying the price

The Government’s decision to allow power producers to ‘pass-through’ the higher cost of coal imported by them, in the tariff for electricity generated, is faulty. This is not because it may lead to an increase in prices for consumers. One cannot agree more with the Finance Minister P. Chidambaram that the choice today is between paying slightly more for electricity and not having it at all. But what makes the pass-through problematic is that it undermines the sanctity of public procurement contracts, specifically in cases where power purchase agreements (PPA) signed with state utilities do not permit producers to pass through their higher fuel costs to consumers. If power producers bagged projects by quoting aggressive ‘levelised’ (flat) tariffs that did not factor in fuel price risks, there can be no justification for any renegotiation of the original PPAs. This is what the Government has now enabled. The Power Ministry will issue advisories to the Central/State electricity regulatory commissions, which can decide the extent of pass-through to be granted on a “case-to-case” basis.

The above pass-though mechanism is bound to be challenged, especially by the state utilities which would argue that the tariffs fixed in the PPAs were discovered through a process of competitive bidding. The bidding documents clearly provided the option for quoting fuel charges that could be escalated based on some verifiable benchmark. If power producers — including those whose plants were entirely fired by imported coal — did not exercise that option, it is probably a result of their determination to bag projects at any cost. Giving the same producers the benefit of ‘pass-through’ for the higher cost of imported coal implies a renegotiation of PPAs signed on the basis of competitive tendering, something that is most certainly going to open a legal can of worms.

The Government will undoubtedly claim that in the absence of a pass-through mechanism, power producers will find it uneconomical to import coal. Given that the existing domestic production cannot meet the fuel requirements of many projects that have already been or will shortly be commissioned, these plants face the danger of operating at sub-optimal capacities. This is something neither they nor their banks and financial institutions — leave alone power-starved consumers — can afford. But this argument does not justify a violation of tendering norms, which is what renegotiation of PPAs to incorporate fuel pass-through amounts to. Such provisions can be permitted in projects that are freshly bid; as far as existing projects go, the only rational and legally tenable solution is for the promoters to exit. That would mean taking losses on their books, which is a risk any entrepreneur should be prepared for making wrong judgment calls on parameters affecting the viability of a project. If projects are rebid, the new competitively discovered tariffs are likely to reflect the ‘real’ economics of running the plant on imported coal.

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