People's Democracy

CHANDRABABU Naidu's reform process in the power sector, largely World-Bank dictated, received a strong rebuff at the hands of the Andhra Pradesh Electricity Regulatory Commission (APERC) on November 6. On various grounds, the Commission refused to approve of the Power Purchase Agreement (PPA) negotiated between A P Transmission Corporation ( AP Transco), and BPL Power Projects (A P) Ltd., regarding the Rs 2,748 crore 2 x 260 mw coal-based pit-head station to be set up at Ramagundam. This is the first PPA, in the entire country, on which a Regulatory Commission held a public hearing, and ultimately refused to approve.

Rejecting the opinion of Justice P N Bhagwati, former Chief Justice of India, as adopted and submitted by BPL. the Commission took an independent decision asserting its authority to inquire into PPAs. The Commission made it clear that when the Legislature conferred the powers of consent on it, it had obviously required the Commission to critically examine the PPA before granting consent. The Commission also asserted that acceptance of the view that the Commission need not go into the details of the arrangement of the PPA in view of the fact that the erstwhile APSEB, now AP Transco, and the state government had already gone into the matter, would amount to abdication of its responsibility.

In an order given on August 17, the Commission had directed the A P Transco to renegotiate with BPL on several provisions in the PPA, and submit a report to it. It was after examining the report and other points of clarification given by both Transco and BPL, that the Commission issued its order of November 6, stating that it was "unable to (give) consent to the PPA".

In its order, the Commission had cited three major reasons for its decision.

First, in its earlier order the Commission had suggested raising the threshold level of the Plant Load Factor (PLF), from 68.5 per cent as incorporated in the PPA, to a reasonable level of 80 per cent, to which BPL did not agree. The Commission pointed out that for NTPC’s coal-based thermal stations the Central Electricity Regulatory Commission had prescribed an availability of 80 per cent, which might be raised to 85 per cent at a future date. Moreover, the average PLF for the last four years for the coal-based plants in the Southern Zone was 81.77 per cent, and 13 coal-based units in Andhra Pradesh also had had an average PLF of about 90 per cent during the last four years. Therefore, the Commission did not see any reason why BPL, which was going to install the latest equipment, should not agree to a PLF of at least 80 per cent at the threshold, for the purpose of recovering fixed costs.

Second, the Commission also suggested that payment of incentives should be restricted to actual generation only, as opposed to being paid on deemed generation, to which BPL also did not agree. The Commission satisfied itself that, in spite of limiting the incentives to actual generation, BPL could still get a reasonable return. The project cost, as approved by the CEA, was of the order of 326.8 million dollars, plus Rs 1228.92 crore. However, BPL sought finance of 480.71 million dollars plus Rs 559.44 crore. The Commission suggested limiting the foreign currency exposure as approved by CEA, and converting the excess dollars into Indian rupees on a commercial operation day basis of the project. This could be done either by de-dollarising the equity, or loans from the Indian financial institutions or banks. This would reduce the risk of foreign exchange variation and also result in reduction of the tariff.

Regarding the interest liability on foreign loans, the Commission noted that, from the evidence available on record, no serious effort appeared to have been made by BPL to evaluate the opportunities in the credit market with a view to mobilising low interest debt funds. In any case, it was a matter on which finality had to be reached before the PPA was signed and the same could not be left to the goodwill of the developer subsequent to the commencement of the contract.

Third, the Commission also found fault with AP Transco for not stating how it proposed to fulfill the escrow obligation, nor furnishing information regarding the escrow cover already given to the existing private power projects , the balance escrow capacity available, and the policy regarding distribution of the same. The Commission confirmed that the PPA proposed by A P Transco did not fully take into consideration the interests of the consumers. "If AP Transco chooses to resubmit the PPA for the Commission’s consent after further negotiation with BPL, if any, it should also come forward with a satisfactory explanation regarding escrow facility", the Commission said.

By its order the Commission has by and large confirmed the correctness of several objections raised by the state secretary of CPI(M), B V Raghavulu and others in their affidavits filed before the Commission against the PPA, justifying their demand for rejecting it.

Another significant point of the order is that the Commission relied on the clarifications given by the Central Electricity Authority (CEA) on almost all the points which it referred to the latter as per the Memorandum of Understanding between them. As a consultant of APERC, the CEA suggested renegotiation on almost all the points referred to it, notwithstanding the fact that it was this very CEA, as a statutory authority of the government of India, which in the first place gave techno-economic clearance to the project of BPL.

This dichotomy in the approach of the CEA as a statutory authority of the government, and as a consultant to the APERC brings to the fore a fundamental question, i.e., whether the CEA is exercising its professional expertise independently and judiciously in giving techno-economic clearances to private power projects, or working under duress from political and bureaucratic pressure.

The Commission's order also proved that there is scope to safeguard public interest by effectively utilising the platform of public hearings by APERC, as long as honest people man the Commission and take independent, dispassionate and judicious decisions within the limitations of the law. This decision was one such which was in refreshing contrast to the APERC’s first order on tariff revision.

The order of the Commission is a severe indictment of the state government’s anti- consumer policy approach relating to the PPA’s.

The Commission did not take into consideration objections raised against the provision of deemed generation, fixing of depreciation allowance of 7.8 per cent and the manner in which the rate of incentive was proposed. When it was pointed out, during the public hearings on another PPA, that the Commission was silent in its order on the issues, its Chairman clarified that the Commission accepted the provisions relating to them as incorporated in the PPA. In view of the impact of avoidable additional burden on the consumers, these issues need to be reexamined by the Commission.

Welcoming the order of the Commission on BPL, CPI(M) has once again requested the Commission to hold public hearings on a priority basis, on PPAs of other projects like GVK and Spectrum which started supplying power before the A P Electricity Reform Act, 1998, came into effect, in view of the questionable provisions therein and highly inflated and manipulated capital costs thereof which were detrimental to the larger consumer interest.