The Supreme Court recently turned down the decision of the Appellate Tribunal for Electricity (APTEL) permitting power companies like Adani Power and Tata Power to charge higher tariffs than agreed upon by the power purchase agreement (PPA). But first the background of this case and why it is important from the perspective of power companies.
Understanding the build-up to the Power Tariff order…
The entire case pertains to the import of Indonesian coal for firing the thermal power plants. Back in 2010 Indonesia had changed its rules pertaining to coal pricing which resulted in sharply higher prices of coal. This resulted in higher coal prices paid out by Tata Power and Adani Power and both companies were importing coal from Indonesia for their plants in Gujarat. While Tata Power was importing coal from Indonesia for its Coastal Gujarat Power Ltd. (CGFPL) plant, Adani Power was importing coal for its Mundra plant. This had resulted in huge losses for both CGPL and the Adani Mundra plant. These power companies currently have PPAs with the state governments of Gujarat, Rajasthan, Haryana and Punjab. The states had refused to accept the demand for modification in the PPA, since as per the contract the modification of tariff was only permitted in case of a Force Majeure situation. A Force Majeure situation refers to a frustration of the contract due to acts of God or other factors beyond their control.
The Tribunal order and the subsequent SC order…
Both Tata Power and Adani Power had approached the Appellate Tribunal for Electricity (APTEL) for revision in the tariffs to compensate for the higher price of coal imported from Indonesia. The APTEL accepted the argument that the sharp rise in price of coal imported from Indonesia amounted to a Force Majeure situation. Hence the APTEL ruled that the power companies were entitled to revise the power tariffs upwards. However, the Supreme Court had a different stand on the matter. The SC ruled that since the higher costs were necessitated by a change in the rules outside India, the Force Majeure clause will not apply. According to the SC, the Force Majeure can only be applied if the change is necessitated by change in the laws or situations within India. As a result the Supreme Court struck down the APTEL order granting the power companies permission to revise tariffs.
What are the implications for Tata Power and Adani Power?
The Supreme Court order is definitely a setback for both the companies and is likely to result in huge financial losses for both the companies. In case of Tata Power, the CGPL plant will no longer be viable and the company will most likely have to forfeit their equity contribution in the project. This will mean that it will have to invite the creditors to take over the plant and then look to sign a fresh PPA with the respective State Electricity Boards. At the current tariff levels, Tata Power is already incurring losses on its CGPL plant and it will be unviable for them to continue. However, the continued financial impact on Tata Power may not be too steep.
Adani Power may be in a much uncomfortable position. Firstly, the company has taken a tariff credit of Rs.8800 crore over the last four years under the assumption that the higher tariff order passed by APTEL will be implemented. With the Supreme Court striking down the APTEL order, it puts Adani Power in a real soup. Firstly, it will have to write off the Rs.8800 crore that it has taken credit over the last 4 years, a problem that Tata Power does not face. This is slightly more than the net worth of Adani Power and that creates a serious solvency problem. Additionally, Adani Power has a debt outstanding of Rs.50,000 crore and with the tariff order, it creates serious solvency challenges for the company as well as to the major banks that have lent to the company. Not surprisingly, the stock price of Adani Power cracked sharply after the SC order.
What is the way ahead?
With the SC striking down the APTEL order, the 2 companies may not have too many options left with them. One option would be to look at alternative sources of coal, other than Indonesia, but getting quality coal and low rates to be profitable within the tariff table will be a very challenging task. Secondly, the companies can file a curative petition with the Supreme Court and argue that the need to import coal from Indonesia was necessitated by the non-availability of quality coal domestically. Therefore, it would be wrong to classify the Indonesia price change as not being a Force Majeure clause.
While the sector moves into challenging times, the bigger question is what happens to stock prices. While the impact on Tata Power may be limited, the impact on Adani Power could be much deeper. The next few months could see interesting developments on this front.
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