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Relief for Tata Power

Tata Power looks set to climb out of a hole this year after the Central Electricity Regulatory Commission (CERC) permitted the country’s largest integrated power company to raise tariffs, giving in to a long-standing demand that had snowballed in the past few quarters into a make-or-break situation for the company.

The private power producer has been allowed to raise the cost of power from the 4,000MW Mundra project by 0.524 paise per unit.

The Tatas had won the bid for the Mundra power project by quoting a levelised tariff of Rs 2.26 per kilowatt hour (kWh). The project was to use imported coal as the feedstock and the Tatas had struck two deals with a group company for the supply of coal from Indonesia.

In April 2007, Tata Power signed power purchase agreements with power distribution companies in five states - Maharashtra, Haryana, Punjab, Rajasthan and Gujarat - for the supply of 3,800MW of power for a period of 25 years.

Problems surfaced in 2010 when the Indonesian government changed its regulations under which holders of mining permits to sell coal based on the spot price in the international markets.

As a result, Tata Power faced the prospect of suffering a loss of Rs 1,873 crore per year if the tariff in the power purchase deals weren’t revised, or a total of Rs 47,500 crore over the 25-year period of the power supply contracts.

In its 110-page order delivered last Friday, the state utilities will not only have to pay a higher tariff to Tata Power for the power purchased but they will also have to compensate the private sector producer to the tune of Rs 329.45 crore.

This amount will have to be paid in 36 equal monthly instalments from the date of the order with carrying costs for the delay in payment beyond due date.

The Tatas had been clamouring for a resolution of the Mundra tariff issue and insisted that the Indonesia’s sudden change in its regulations amounted to a force majeure condition, which the power distribution companies contested.

The CERC order comes as a huge relief to Tata Power but analysts do not rule out the possibility of the order being contested as the state utilities will otherwise have to pass on the increase to their customers. This could prove to be challenging for incumbent state governments to justify at a time when the country is gearing up for general elections.

Experts agreed that the order would cut down the losses that the Mundra project was suffering.

Many brokerages upgraded Tata Power following the CERC order. According to a note from Edelweiss Securities, the company is likely to get a net tariff increase of Rs 0.40/kwh, which will translate into a Rs 25 per share upside.

“Though the current order could get challenged/ contested at the higher judicial bodies could delay the finalisation of the compensatory tariff process, we are of the view that a stay on the CERC order is not likely,” the brokerage added.

Meanwhile, the Tata Power stock shot up over 5 per cent as the stock was re-rated by a clutch of brokerages.

Shares of Adani Power also rallied as it is entitled to a compensation of Rs 829 crore from two state utilities.

“The company finds the order balanced, perhaps keeping in view the beneficiaries and consumer interests. The decision of CERC was awaited to make Mundra viable, which had got impacted due to no fault of itself, but due to change of law in Indonesia as also other coal exporting countries and an unprecedented rise which could not have been perceived. This will go towards resolving a major impasse affecting imported coal based power projects in the country that got impacted due to uncontrollable extraneous factors. The order provides partial relief to Mundra UMPP,” Tata Power said in a statement.

Source: The telegraph