People's Democracy

ANDHRA PRADESH 

Govt Order Rakes Up Fresh Controversy 

M Venugopala Rao 

THE Congress government in Andhra Pradesh recently issued a questionable order, permitting the four gas-based private power projects to make third party sales of 20 per cent of their installed capacity as determined in the Power Purchase Agreements (PPAs) they had entered with the four power distribution companies (discoms). This has triggered a fresh controversy in the state on several grounds, with several opposition parties, a section of the media and public- spirited people criticising the decision. While the process of public hearing on the petitions filed by four discoms and developers of the projects --- Gautami Power Private Limited (454 MW), GVK Industries Limited (220 MW), Konaseema EPS Oakwell Power Limited (445 MW) and Vemagiri Power Generation Limited (370 MW) --- seeking consent of Andhra Pradesh Electricity Regulatory Commission (APERC) to the amendments proposed to the PPAs as directed by the government last year is going on, the latter issued an order (G.O.Rt.No.135) on October 13, reiterating its earlier decision on the proposed amendments. However, the government has issued this order under section 108 of the Electricity Act 2003, which says that �in the discharge of its functions, the State Commission shall be guided by such directions in matters of policy involving public interest as the state government may give to it in writing.�  

LONG HISTORY OF

CONTROVERSIES

The present controversy, like those involving other private power projects in the state, has a long history. After the discoms were selected through competitive bidding and the PPAs were signed in 1997, there has been inordinate delay in completing these projects and declaring the commercial operation date (COD). After several changes and extensions for declaration of COD, APERC gave its consent to the PPAs of these four projects in 2003. One of the controversial and illegal provisions in the PPAs is that if natural gas is not available, the projects can declare their readiness to generate power with alternate fuels like naphtha. Also, if the discoms ask the projects not to use such high-cost alternate fuels for generation of power, they have to pay full fixed charges to the tune of Rs 1020 crore per annum to the projects without getting even a single unit of power. The APERC gave its consent to the PPAs while ignoring the valid objections of several objectors, including B V Raghavulu, state secretary of the CPI(M), and S Sudhakar Reddy, the then state secretary of the CPI, and the correspondence between the state and central governments. The APERC also expressed satisfaction that there would be no problem in supply of natural gas to these projects during the 15-year term of their PPAs. However, as anticipated, the government of India could not ensure natural gas supply to these projects as per the allocations made by its committee. Subsequently, the then chairperson and managing director of APTRANSCO, Rachel Chatterjee, got petitions filed before APERC in 2004, seeking the deletion of the illegal alternate fuel clause from the PPAs that provides for  payment of full fixed costs to the developers by the discoms under deemed generation.

While the hearing on petitions filed by APTRANSCO/discoms for deletion of alternate fuel clause has been going on, developers of Vemagiri project came to an agreement with the government, agreeing for deletion of this from their PPA and seeking extension of its term to 23 years. They also wanted third party sales of capacity over and above the PPA capacity so as to recover the fixed costs likely to be foregone in case of non-availability or partial availability of natural gas during the term of the PPA, among others. This followed the recommendations of a high power committee of the government, headed by the then minister for finance and the present chief minister K Rosaiah. After holding public hearing, APERC gave its consent to the proposed amendments in 2006.

After filing a petition in the AP High Court, seeking a direction to APTRANSCO to provide facility of inter-connection with the grid to its project, developers of GVK project withdrew that petition and entered a temporary power supply agreement for six months ending February 15, 2007 with APTRANSCO. This was totally unrelated to the terms and conditions of the PPA for testing project equipment to meet their EPC contractor�s obligations. Developers of  Gautami project, which belongs to the same GVK group, filed a petition in the High Court, seeking a direction to APTRANSCO, government of India and GAIL (India) Limited, among others, to ensure supply of natural gas for conducting performance test. They got a favourable order and the projects went back on their written commitment to agree to amendments to their PPAs on the lines of Vemagiri.

Later, a division bench of the High Court struck down the order of the single judge. In a significant order on June 18, 2007, the division bench observed: �When the action of the state and/or its agencies/instrumentalities is challenged on the ground of violation of legal or constitutional right of the petitioner and there is a clash of the right of the individual or group of individuals on the one hand and the right of the public at large on the other hand, the court must carefully examine the entire matter and ensure that the public interest is not sacrificed in the name of protecting the individual right.�

The division bench further observed: �We are further of the view that it will be totally against public interest to compel respondent No. 6 (GAIL) to supply gas to the writ petitioners (projects) by curtailing supply to the existing units engaged in the generation of electricity.�

Having failed to get a favourable order in the appeal filed in the Supreme Court, the developers of GVK and Gautami projects got permission of the court on July 3, 2007 to �approach the respondents for settling the dispute.� The developers of the projects approached the Y S Rajasekhara Reddy government and managed to get its agreement to their new proposals for amending the PPAs. As per the new agreement, the alternate fuel clause is to be deleted and there would be no extension of the term of the PPAs beyond the original 15 years. The projects would be allowed to make third party sales of 20 per cent of their respective PPA capacity and the capacity over and above the PPA capacity. Both of these work out to about 350 MW. 

UNTENABLE

GOVT STAND  

The decision of the government and the arguments put forth by the discoms and the developers to justify the decision are untenable and detrimental to the larger public interest. In the presentation made before APERC on behalf of the discoms, it was stated that the Rosaiah committee had requested the developers to consider their original proposal (on the Vemagiri lines) �in the interest of state and consumer� but they could not accept it, thereby making it clear, by implication or otherwise, that the present proposed amendments are not in the interest of the consumers and the government.

The alternate fuel clause in the PPAs is violative of a resolution No.A-27/94-IPC9VOL-II dated November 6, 1995 of the ministry of power, government of India. It says �the responsibility of either indigenous or imported fuel linkage would be that of the independent power producer (IPP) and any fuel supply risks would have to be shared between the IPP/fuel supplier. The State Electricity Board will not take any fuel supply risk.� Nowhere it is explained by the government or the discoms or the developers of the projects as to under which provisions of the Electricity Act, 2003 and the rules and regulations made thereunder, or under which policies framed by the government of India or the state government or under which provisions of the PPAs, are the projects entitled to recover the so-called enormous losses supposed to have been incurred by them before declaration of COD of their plants from the discoms and through sale of 20 per cent of PPA capacity of their projects to third parties.

Moreover, the projects cannot make claims for recovery of any such �losses� or additional capital expenditure incurred in the form of interest during construction, etc, till they declare COD, from the discoms, because the terms and conditions of the PPAs simply do not provide for such recovery, as the projects were selected on the basis of price bids.  

HEAVY BURDEN ON

CONSUMERS, GOVT

Because of the failure of government of India to ensure natural gas supply to the projects of GVK, Gautami and Konaseema and the latter�s failure to generate and supply 8406.62 million units (MU) of power per annum with a plant load factor (PLF) of 85 per cent,  the discoms had to purchase, in a situation of scarcity for power, additional power to the extent of 13413 MU during the last three financial years. This involved an additional burden of more than Rs 5123 crore, i.e. the difference between the price to be paid for power to be generated by these projects using natural gas and  the price paid by the discoms for purchasing additional power from other sources.

The average cost of additional power purchased during 2008-09 is Rs 8.10 per unit. Had the three projects generated with a PLF of 85 per cent and supplied power to the discoms during the last three financial years, apart from saving the discoms from the additional burden, it would have enabled them to earn substantial additional revenue by selling surplus power. If the discoms forego 20 per cent of the PPA capacities of the projects, as decided by the government, they have to bear heavy additional financial burden for purchasing additional power in situations of demand exceeding availability under arrangements of PPAs with various power projects, and lose additional revenue on sale of surplus power if the situation is the other way.

It is clear that the arrangement intended to be made under the proposed amendments to the PPAs is a variant, with a difference in degree, of the questionable arrangement that is there under the illegal provision of use of alternate fuel. The latter arrangement provides for payment of fixed charges when gas is not available but projects declare capacity for generation of power with alternate fuel and discoms refuse to buy the same. Moreover, if the cost of power purchase exceeds the limits prescribed in the annual tariff order of APERC, the additional amount will have to be borne by non-agricultural consumers of power under fuel surcharge adjustment or the government will have to bear it as additional subsidy. 

UNDUE BENEFIT

TO DEVELOPERS

If we take 20 per cent of the PPA capacity of 1499 MW of the four projects, i.e. about 300 MW, the generation with 100 per cent PLF would be 7.2 MW per day or 2628 MW per annum. The latest tariff to be paid for power generated by these projects is Rs 2.85 per unit. If we deduct this from the cost of additional power purchased during 2008-09, the additional cost per unit of power works out to Rs 5.25 (8.10 -- 2.85). In other words, for purchasing additional power of 2628 MW, the discoms will have to shell out an additional sum of Rs 1380.12 crore per annum. Conversely, that would be additional profit to the project developers if elements of uncertainty relating to generation and sale of power are not taken into consideration.

In any case, despite such likely uncertainties, even if it is presumed that the developers have to be compensated for non-recovery of fixed cost during the period when gas was not available from the date of deemed COD,  the additional profits that would accrue to them would be several times the claimed �losses� in view of the persistent scarcity for power in the country and very high prices of power in the open market even after providing for transmission and wheeling charges to be paid for third party sales outside the state. While the four projects have estimated non-recovery of fixed costs, etc to the tune of Rs 1100 crore, whose permissibility is yet to be decided by APERC, the estimated additional profits to them on sale of 300 MW per annum, subject to periodical fluctuation of prices in the market, for a period of 15 years would be Rs 20701.8 crore!

As per the terms and conditions of the PPAs, these projects get foreign debt component (FDSC) within first 10 years and other fixed cost (OFC) --- components of fixed costs --- within 15 years. While the useful life span of a gas-based power plant is 25 to 30 years, the consumers are paying 90 per cent of depreciation charges within a period of 15 years only, without getting the benefit of supply of power till the end of the plant�s useful life span.

This frontloading of tariff is one of the serious aberrations of the �reform� process. It gives undue benefit to the developers at the cost of consumers of power of the discoms. If the projects have to sell power to the discoms till the end of useful life span of their plants, fixed cost has to be worked out on the basis of what is being paid towards depreciation charges every year. Or, if the term of PPA is extended after 15 years, only the balance of capital cost needs to be adjusted in the fixed cost to be paid by the discoms for the remaining period of PPA. If the projects sell power to third parties after expiry of the term of 15 years of the PPA, they can make a killing by selling it at any price depending on market conditions, though the actual fixed cost would be much lower. That is the reason the developers are extremely adamant not to extend the term of the PPAs beyond 15 years, though selling power to the discoms guarantees sale and payment. The developers are not willing to adjust the undue benefit of frontloading of tariff for the additional expenditure or uncovered loss they are supposed to have incurred before declaration of COD of their plants. 

GOVERNMENT�S 

ARROGANCE

In view of these objections, among others, raised during the course of the public hearing which has been going on since March 4 this year, APERC sought some clarifications from the discoms who, in turn, sought some from the government. One of the important clarifications sought by the commission is that the loss suffered by the developers due to non-availability of gas from the date of deemed COD up to April 2009 (when supply of gas commenced) should be commensurate with the benefits given in the proposed amendments. 

However, the proposal of the commission  �to provide truing up mechanism to check up to what extent of period the benefit of 20 per cent need to be given� to the projects is rejected by the government. The intention of the commission is to restore 20 per cent capacity to the discoms once the projects recover the permissible amount of unrecovered fixed cost fully through third party sales. Truing up mechanism means an arrangement whereby the discoms pay to the projects an additional sum per unit of power purchased from them, in addition to the PPA price, for a period at the end of which the projects recover such permissible amount fully. Thereafter, the discoms will continue to pay only PPA price for power. It ensures that the Discoms get entire capacity of the plants, without third party sales, and the developers get the permissible fixed cost they could not recover due to non-availability of gas.

It is noteworthy that the commission has rejected the interim applications of the developers, seeking permission to make third party sales, pending final orders of the commission. Instead of providing estimates of such permissible losses and recovery of the same through third party sales, the government in the above-mentioned GO says: �GOAP is also of the firm opinion that its clear cut policy need not be tested on the anvil of micro mathematics of various claims and losses.� A hefty sum of more than Rs.1380 crore per annum, that, too, for a period of 15 years, is simply �micro mathematics� that deserves to be ignored in the perverted view of the government.

But the reality is that, having blindly conceded the unjust and manipulated demand of the developers for the amendments as proposed, for their own extraneous considerations, the government is not in a position to justify the same in legal and financial terms. To cover up its inability and discomfiture in the light of the clarifications sought by the commission, through the recent GO, the government is exhibiting arrogance that it is not accountable to any one for its decisions, that it need not reexamine its decision in the light of the clarifications sought by the commisision and objections raised during the public hearing being conducted by the latter, that it need not give clarifications sought by a quasi-judicial body like the commission and that the latter also should give its consent to the proposed amendments mechanically just as it itself has conceded the questionable demands of the developers. That the government has issued the GO under section 108 of Electricity Act 2003, when the public hearing of APERC is in the penultimate stage, is proof enough of its undemocratic approach, its contempt for regulatory process of the commission and its servility to subserve the vested interests of private corporate houses at the cost of larger public interest. The chief minister has bluntly refused to review the decision and revoke the GO. That is the class character of the Congress government, no matter who the chief minister is.