Is Adani Power’s Mundra Plant Entitled to Hike Tariffs?

On August 16, senior advocate Dushyant Dave wrote to the judges of the Supreme Court of India alleging that two cases involving companies in the Adani group “in complete contravention of the settled practice of the Supreme Court as also its established procedure...were listed, taken up and heard without any justification...causing grave injury to public interest and public revenue.”

Dave alleged that “it is disturbing that the Supreme Court of India should take up regular matters of a large corporate house during summer vacation in such a cavalier fashion and decide them in its favour.” Dave, who had himself represented companies in the Adani group in the past, highlighted a number of cases that had been decided in the favour of the group, pointing out various procedural irregularities in how these cases were handled by the country’s apex court. The senior advocate’s allegations have been denied by the Adani group.

As these writers have been arguing in our coverage of issues relating to the Adani group in recent months, the Supreme Court is far from the only legal forum at which such irregularities have been alleged by a variety of institutions ranging from the government’s own Directorate of Revenue Intelligence to multiple public sector companies and various civil society organisations.

In the coming weeks and months, a slew of cases involving the Adani group will come up before the country’s electricity regulators, presenting another occasion for public scrutiny of how the concerns of the corporate conglomerate headed by Gautam Adani – the billionaire industrialist considered close to Prime Minister Narendra Modi – and those of electricity consumers are treated by courts of law and regulatory institutions.

In December 2018, 21 months after the April 2017 Supreme Court decision disallowing three power companies, including Adani Power, to increase electricity tariffs, the Gujarat government found a way to increase the tariffs it pays to an Adani group-owned thermal power plant in Mundra. Now, challenges to the mechanism that allowed the state government to hike tariffs have found their way to country’s top electricity regulatory authority, the Central Electricity Regulatory Commission (CERC), and its appellate body, the Appellate Tribunal for Electricity (APTEL).

A Gujarat government-owned electricity distribution company– the Gujarat Urja Vikas Nigam Limited (GUVNL) – and an association representing engineers working in the power sector – the All India Power Engineers Federation (AIPEF) – have approached the CERC and APTEL challenging the supplementary power purchase agreements (SPPAs) that public-sector power distributors were made to sign with Adani Power’s 4,620 megawatt power plant in Mundra, Gujarat, together with two other thermal power plants owned by the Tata and Essar groups. The SPPAs contractually incorporate tariff increases.

While the petitions by GUVNL and AIPEF challenge the SPPAs on multiple counts, the Federation’s petition has disclosed previously-unknown details about how Adani Power’s Mundra plant originally secured the right to sell electricity to public-sector power distribution companies (discoms) in four states besides Gujarat. This article reviews the arguments made against the increased tariffs and the new information that the court proceedings have brought to light.

THE BACKGROUND

In April 2017, the Supreme Court had ruled on the question of increasing tariffs for the power plants in Mundra, concluding a raft of cases that had made their way through electricity regulatory structures over several years. The companies belonging to the Adani, Tata and Essar groups, had sought a revision of power tariffs on account of higher costs of imported coal which is used at these power plants due to a decision of the Indonesian government. Prior to the Supreme Court’s decision, CERC and APTEL had denied the claims of the companies concerned, but in each instance an alternate route was found by which the firms could be compensated.

The Supreme Court’s decision had “slammed the door shut” on all such routes, denying all grounds of compensation by way of increased power tariffs on account of changes in the cost of imported Indonesian coal. Hailed by one of these authors then as having “raised the bar” for the Indian power sector, in that ruling, the Court had emphasised the principle that companies that bid to set up power plants and sell electricity assume the risks inherent to the business of power generation, including fluctuating fuel costs, and the consumer could not be expected to bail them out when such risks threaten to cause business failures.

However, the Court’s order did not establish finality on the issue. In one case, on which we reported in NewsClick in June, a different Adani group-owned power plant at Kawai, Rajasthan, was granted higher power tariffs despite using the same Indonesian coal. We argued that this was done on the basis of a flawed reading of the apex court’s judgement.

In the Gujarat case, on the other hand, while the Supreme Court had technically barred revisions in tariffs under existing contracts between the power plants and the public-sector discoms, government mandarins who were determined to find a way to grant compensation to the generating companies were clearly not convinced of the principle articulated in the judgement. To them, since the judgement had pronounced that no tariff revisions would be possible under the existing power purchase agreements (PPAs), it presented an opportunity to renegotiate the agreements and devise “supplementary” agreements.

This was the conclusion of a “high-powered committee” that the Gujarat government had set up to examine the issue of how the “stranded assets” of these power plants could be revived. The three power plants that together supplied 45% of Gujarat’s electricity demand and also supplied electricity to four other states – Haryana, Maharashtra, Rajasthan, and Punjab – were faced with mounting debts and had almost ceased operations. The committee’s formation was a result of insistence by banks that had financed the construction of the power plants which would be saddled with huge non-performing assets, were the projects not revived.

The three-member committee comprising former Supreme Court judge R K Agrawal, former Deputy Governor of the Reserve Bank of India S S Mundra, and former Chairperson of the CERC, Pramod Deo, was set up in July 2018 after a period of speculation on these power plants’ future. During this period, various options –including sale of the power plants to the Gujarat government or other interested private companies ­– had been mooted.

These writers had reported in September 2018 on the draft report prepared by the committee in which a formula for increased tariff and a route to renegotiate the PPAs was devised. The committee’s final recommendations were accepted by the Gujarat government soon thereafter with some modifications. The renegotiated “supplemental” (sic) PPAs (SPPAs), according to the committee’s scheme, were subsequently signed between Gujarat government-owned power distribution companies and Adani Power in December 2018. Four months later, in April 2019, the SPPAs received the CERC’s approval. It is this approval that has been challenged.

The GUVNL has approached the CERC itself, claiming that Adani Power has violated the SPPAs and sought a refund of the amount it has paid as “compensatory” tariff under the renegotiated terms. The AIPEF has approached APTEL in appeal against the CERC’s approval.

THE APPEALS

The two appeals are different in nature. While GUVNL is alleging violation of the terms and conditions of the SPPAs thus asking the CERC to declare the agreements void, the AIPEF is seeking to challenge the SPPAs’ validity themselves.

The Economic Times, reporting on the GUVNL’s plea, claimed that “the discom (distribution company) has alleged breach of the add-on contracts (SPPAs) by Adani Power, which, after signing them, moved the Supreme Court to end one of the agreements.” According to the report published on May 20, barely a month after the approval of the SPPAs by the CERC in April 2019 that granted compensatory tariffs with effect from October 15, 2018, Adani Power approached the Supreme Court seeking to terminate one of its PPAs with GUVNL on account of unavailability of coal from the Gujarat Mineral Development Corporation-owned Naini coal block. This was allowed by the apex court on July 2.

An Economic Times report quotes the GUVNL stating it had “bona-fide proceeded with the scheme for redressal of the hardship to Adani based on the representation given by Adani and had finalised the redressal on the specific stipulation that Adani shall not claim any relief in respect of the period prior to October 15, 2018 on any account whatsoever... However, later developments in the matter and the action taken by Adani has established that Adani has misrepresented the position in regard to the sacrifices being made and has obtained the substantial advantage of getting increased tariff for the period from October 15, 2018.”

The AIPEF’s petition before the APTEL goes several steps further stating that the tariff hike “destroys the regime of the Electricity Act” and violates “fundamental provisions relating to tariffs as well as the sanctity of the competitive bidding system.” On July 19, it was reported that APTEL had issued notice to Adani Power seeking its response, having admitted and agreed to hear the AIPEF’s appeal. It is worth noting that the same body had earlier this year refused to hear an intervention application by the Federation on the question of tariff hikes for the Adani Power-owned plant in Kawai, Rajasthan.

Detailing the process by which bidding for supply of electricity to GUVNL had been done in the first place, which resulted in Adani Power winning the bids and earning the right to supply power from its Mundra plant, the petition states that “bidding is conducted to promote transparency, competition, protecting consumer interests in the form of lower tariff, certainty of tariff, and to prevent asymmetry of information to all bidders...[and the approval of a tariff hike] in this case is in violation of all these objectives/principles.”

The AIPEF petition quotes the Supreme Court order which stated that “the price payable for the supply of coal is entirely for the person who sets up the power plant to bear... (and that) an unexpected rise in the price of coal will not absolve the generating companies from performing their part of the contract for the very good reason that when they submitted their bids, this was a risk they knowingly took.” In other words, the Federation asserted that the same grounds on which the Supreme Court had disallowed a tariff hike (that is, a rise in the cost of imported Indonesian coal) is now being made the grounds for a tariff hike, using the route of renegotiated PPAs or SPPAs.

In addition, the Federation’s petition also brings up the ongoing investigation by the DRI into allegations of “over-invoicing” of coal imported from Indonesia by Adani group companies among others, as a pertinent issue that has persistently been ignored by electricity regulators ruling on tariff issues arising due to rising costs of the same Indonesian coal.

These authors have reported in detail on the DRI investigation in several previous articles. At present, the investigations into the Adani group companies have run into a roadblock. Documents that the Directorate has been seeking from the State Bank of India’s Singapore branch relating to the Adani group’s mining operations in Indonesia and imports of coal to India, have been denied to the DRI by the SBI. The Directorate’s subsequent attempts to acquire these documents, by issuing Letters Rogatory seeking the help of Singapore’s judiciary, have been blocked by the Adani group in court, an issue that the DRI is currently appealing in the Supreme Court. A public interest litigation (PIL) petition by the Delhi-based non-government organisation, Common Cause, requesting that a special investigation team (SIT) be set up to take over the investigation, is also currently being heard at the Delhi High Court. (Disclaimer: one of the authors of this article is a member of the Governing Council of Common Cause.)

The AIPEF’s petition argues that DRI’s pending investigations must be considered while deciding on the validity of the tariff hikes. It points out that in the April 2019 order approving the SPPAs, the CERC has observed that “these allegations (by the DRI) are of no relevance in the present proceedings.”

The Federation contends that the CERC’s claim is “outrightly wrong, as the whole claim of [Adani Power] of incurring loss is based on the increase in the Indonesian coal price due to a change in law in that country, and when the preliminary investigation of the DRI has revealed the irregularities of over invoicing being committed...the CERC should have, notwithstanding the pendency of investigation directed [Adani Power] to produce all the relevant documents/bills related to import of Indonesian coal...in order to come to its own finding on the issue” and “so long as documents/invoices...are not submitted by [Adani Power] no relief on account of coal price should be allowed.”

NEW INFORMATION: INCOMPLETE BIDS?

The AIPEF petition has brought to light details regarding the claims Adani Power had made when it first bid to supply power to the GUVNL in 2006-07, which serve to strengthen its position that Adani Power is in no position to demand and receive increased power tariffs on account of a rise in the cost of Indonesian coal.

Under the Electricity Act of 2003, the tariff determination process via competitive bidding is structured as follows. A bidder on a contract to supply power can quote “capacity charges” that cover capital expenditure and “energy charges” that cover operational expenditure, including fuel cost. Both can be either fixed or “non-escalable” or escalable according to an escalation index specified by the CERC. A submitted bid is modified by a “discount factor” specified by the CERC to arrive at the “levelised tariff” which is used to compare bids submitted by different companies on a particular tender.

In January 2007, a consortium led by Adani Power had submitted its bid for generation and supply of 1,000 MW to GUVNL, quoting a levelised tariff of ₹ 2.3495/kWh (kilowatt hour) with ₹ 1 per kwh as the capacity charge, and ₹ 1.3495 per kwh as the non-escalable energy charge. The consortium won the GUVNL contract on January 11, 2007 with a letter of intent (LoI) issued in its favour. This was followed by a PPA between GUVNL and Adani Power signed on February 2, 2007 for the supply of power from a project being set up at Korba in Chhattisgarh. The agreed terms were changed on April 18, 2007 when the power source was changed to the Mundra project.

At the time of bidding, the consortium had indicated that the Adani Group— through its flagship company Adani Enterprises Limited (AEL)—had an arrangement with the Gujarat Mineral Development Corporation for indigenous coal procurement for the project, because it had been allotted a certain coal block in Chhattisgarh. AEL said that it had signed a memorandum of understanding (MoU) with a German company named Coal Orbis Trading GMBH for the supply of 3-5 million tonnes of imported coal on a long-term basis till the year 2032.

There was a similar MoU between AEL and a Japanese agent (Kowa Company Limited) for supply of three to five million tonnes of coal on a long-term basis. The two MoUs were attached to the bid proposal submitted to GUVNL. At this stage, Indonesian coal was nowhere in the picture. It was at a later stage, after Adani Power had won the bid, that it modified its arrangements to run the Mundra power plant almost entirely on coal imported from Indonesia.

In its petition, the AIPEF zooms in to this sequence of events. The Federation points out that under the bid conditions, the bidders were required to attach proof to their bids that fuel supplies had already been secured in the form of executed fuel supply agreements if their bids were based on domestic coal, while if based on imported fuel, they were given the flexibility to enter into fuel supply agreements within 14 months of the issuance of LoI. It also points out that the bid had quoted non-escalable tariffs, irrespective of fuel cost, on the basis of which it had won the contract having offered the lowest tariff rate.

On the MoUs with the German and Japanese companies, the petition notes that those MoUs were “vague” and reveals that the MoUs had no assurances on coal supply or the price at which it would be supplied. It notes that the arrangement with GMDC that Adani Power had claimed it had in place, was in fact merely a letter dated November 14, 2006 from GMDC to Adani Power stating that the former would supply coal from its Morga-II coal block to the latter subject the execution of a detailed “take or pay” agreement.

All this goes to show, according to the petition, that Adani Power “did not have any arrangement of fuel at the time of bidding” and “covered it up” by stating in its bid that it was based on “imported/indigenous coal” and specifying little else. The AIPEF’s argument is that if the winning bid that determined the tariff payable was not based on Indonesian coal, how can a rise in the cost of Indonesian coal be the basis for a revision of the tariff?

REPEATEDLY ‘UNDERMINING’ SC JUDGEMENT

In a previous article, concerning a different Adani Power-owned power plant at Kawai, Rajasthan, these writers had argued that the Supreme Court’s April 2017 judgement has been “undermined” in the subsequent developments, with the Gujarat government devising a tariff hike via renegotiated PPAs, and in the case of Adani Power-owned power plants in Maharashtra and Rajasthan. This, in our considered opinion, is a misreading of the apex court’s order and being used to justify tariff hikes, due to the rise in the cost of Indonesian coal which the Supreme Court had declined to pass on to Indian electricity consumers.

The AIPEF, though a latecomer to the litigations at various forums, has mounted a challenge to these different routes to justify the tariff hikes, with this petition forming another step in the process. In the final instance, the issue may once again land at the doorstep of the Supreme Court. Will the undermining of its April 2017 judgement continue? Only time will tell.

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