If a firm got a stressed power asset at discount, it must cut tariff: UPERC

Adding a new twist to the ongoing sale of stressed power assets, the Uttar Pradesh Electricity Regulatory Commission (UPERC) has taken a view that if a bidder acquires assets at a discount then it must pass on the benefit to customers by reducing power tariffs.

Renascent Power Ventures, an arm of Tata Power-backed Resurgent Power Ventures, which had acquired a 75.01 per cent stake in Prayagraj Power, may have to offer a discount on the power tariff to State Discom Uttar Pradesh Power Corporation Ltd (UPPCL) to pass the benefits of acquiring the asset at a discount to consumers.

In its order dated March 7, the Uttar Pradesh Electricity Regulatory Commission (UPERC) has directed State Bank of India, the leading lender to Prayagraj Power, to submit its offer of reduction in fixed charges and also the computation on the basis of which such reduction is offered, within one week.

“If power sector assets are sold by financial institutions at much less than the book value without corresponding adjustment in tariff, it will create a perverse incentive for buying these assets at the cost of public,” the order said adding that this will also create a possibility of undue arbitrage.

The Commission said that if no concession in fixed charges is offered, the regulator might decide the terms and conditions for the proposed transfer of shares in Prayagraj Power to the new owner on the basis of information available with it.

When contacted, a spokesperson of Tata Power said considering that transfer of shares has not yet been completed, it is up to lenders which currently have over 90 per cent stake in the asset to decide on the economy of the power tariff of the plant. SBI will have to submit details requested by the regulator, the spokesperson said.

However, according to sources aware of the details, SBI is likely to suggest that no discount would be possible considering that under the existing PPA (power purchase agreement) the power plant has to make profits as it has to service its obligations to various creditors.

The next hearing of the matter by the UPERC is scheduled for March 25.

Consumer interest

In its order, the UPERC said while it has no objections to transfer of shares to the new owner, it saw a reduction in fixed charges as a necessity to save undue enrichment to the new owner as well as to safeguard the consumer’s interest.

“There is no denying of the fact that now with the zero debt, the element of interest on loan, which is part of fixed cost would become zero. As a result, enough head room is available for the new incumbent to share this saving with the consumers,” the order stated.

Order impact

The resolution of Prayagraj Power has emerged as one of the first cases where a stressed power asset has been resolved outside of the National Company Law Tribunal (NCLT) after the Supreme Court stayed insolvency proceedings against companies in power, sugar and shipping sectors that have challenged the Reserve Bank of India’s February 12 circular on non-performing loans. Since then, just a handful of other assets have been resolved in a similar manner with many more assets still going through the resolution process.

The UPERC order will have a significant impact on the industry going forward, according to experts, considering that lenders have become more proactive in resolving stressed power assets and are ready to settle the outstanding loans by taking significant haircuts.

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