Supreme Court Disallows Compensatory Tariff To Adani Power, Tata Power

Shares of Adani Power fell as much as 20 percent while Tata Power fell almost 7 percent.

A Power Plant (Photographer; Prashanth Vishwanathan/Bloomberg)
A Power Plant (Photographer; Prashanth Vishwanathan/Bloomberg)

Adani Power Ltd. and Tata Power Ltd. suffered a setback on Tuesday as the Supreme Court set aside the ruling of an appeals tribunal that allowed the two companies to charge more than agreed tariffs to recover higher cost of imported coal.

Adani Power will decide its future course of action once it receives the apex court's final order, and will keep stakeholders informed, the company said in an exchange filing. Terming the order “unfortunate”, Tata Power said it will “continue to work towards alternatives, including sourcing of competitive and alternative coals to best contain the onslaught of under recovery."

After the verdict, shares of Adani Power fell as much as 20 percent, the most in nearly eight years, while Tata Power declined 6.7 percent, its biggest fall since August 2015.

The Supreme Court’s ruling prima facie is very bad as the market was expecting some relief from compensatory tariff, said Harshvardhan Dhole, research analyst at brokerage IIFL Institutional Equities. “Losses are only going to increase if the coal prices further increase. So, that structural risk to revenue model would only increase. We are factoring in Rs 1,000 crore of loss for Tata Power, both in FY17 and FY18 and this move definitely calls for de-rating,” he said.

State electricity distribution companies had moved the apex court against the order of Appellate Tribunal for Electricity (APTEL), which had accepted the power producers’ argument of a ‘force majeure’ (unforeseeable) event while allowing their subsidiaries to charge compensatory tariff.

The force majeure provision allows power producing companies to deviate from previously agreed upon power purchase agreements (PPAs) and charge a higher price from state power distribution companies as compensatory tariff if circumstances beyond their control justify the hike.

The Supreme Court, which had reserved its verdict on March 30, had to determine two questions in the case. First, whether the regulatory body can alter competitively bid tariffs to award compensation to the two companies. Second, whether the increase in price of coal being imported from Indonesia would fall into the definition of a force majeure.

Coastal Gujarat Power Ltd. (CGPL), a subsidiary of Tata Power Company Ltd., had set up a power plant at Mundra in Gujarat. CGPL entered into a power purchase agreement with states of Gujarat, Maharashtra, Rajasthan, Punjab and Haryana. Similarly, Adani Power too struck similar PPAs with state discoms for generating power from its Mundra project.

During the hearing at the Central Electricity Regulatory Commission in 2016, the two companies contended that the Indonesian government in 2010 brought in new regulations. As a result, they supplied power by purchasing coal at a higher price than what was mentioned in the PPAs, they said.

The state discoms argued that the power producers cannot claim to be affected by Indonesian regulations and should not be denied relief under the force majeure provision.