Discoms and State Regulators
Good decisions but bad incentives remain
APTEL Rules in Favour of Solar Developers, Strikes Down Reduction of Tariff in Uttar Pradesh
APTEL Orders TANGEDCO to Pay Solar Developers for Excess Power Consumed
CERC Allows Compensation to Solar Developers Under Change in Law due to GST
These three headlines appeared in my news feed just last week. The orders they refer to answer the following questions:
Should a state electricity regulatory commission (SERC) condone the actions of a state owned distribution company (Discom) to unilaterally reduce a tariff agreed under a power purchase agreement (PPA) signed following a competitive bid process?
Should an SERC pass an order supporting a Discom's decision not to pay for power that it consumes in excess of the capacity utilisation factor (CUF) under a signed PPA?
Should solar power developers be denied compensation for change in law on account of higher operation and maintenance (O&M) costs arising as a consequence of GST, especially when the PPA provides for such compensation?
For reasonable people, the answers to the above questions are no. If you’re a Discom, not so much.
That APTEL and CERC took the right decisions in these matters, siding with the power producers, is encouraging. That Discoms and state regulators continue to pursue and defend contractually and legally untenable positions is as discouraging as it is predictable.
Uttar Pradesh – unilateral reduction in tariff
Certain solar developers, including Adani Green Energy and Shashtradhara Energy, had entered into 12 year PPAs at a tariff of Rs. 7.02 with the Uttar Pradesh Power Corporation (UPPCL) in December 2015. Following a long tussle over delayed construction of transmission lines and an attempt by UPPCL to terminate the PPAs, the UPSERC proposed a reduced tariff of Rs. 5.07. APTEL ruled against UPPCL and UPSERC, holding that the attempted tariff reduction was arbitrary, unjust, and unlawful.
Tamil Nadu – not paying for power
Various solar power developers signed PPAs with TANGEDCO based on a normative CUF of 19%. For various reasons, including improved efficiency, the projects generated power in excess of this CUF. TANGEDCO drew and further sold on this power but refused to pay for it. It argued that because the PPAs provided for 19% CUF, they were not required to pay for power generated in excess of this standard. TNERC, the state regulator, backed them up. The solar power developers and the industry association, National Solar Energy Federation of India, argued that neither any tariff orders nor the PPAs provided that excess generation beyond the normative CUF of 19% would not be paid for. Further, to take but not pay for such power was unjust enrichment. APTEL agreed and referred to the Ministry of Power guidelines on competitive bidding for solar projects, which provided that power supplied in excess of the normative CUF should be paid for at 75% of the PPA tariff. APTEL set aside the order of TNERC and ordered compensation to be paid for the excess power taken by TANGEDCO.
Change in law compensation for GST on O&M
The Central Electricity Regulatory Commission ruled that solar developers were entitled to compensation for change in law from power purchasers for higher expenses incurred after the Goods and Services Tax (GST) came into force. The Commission’s order allowed compensation to developers on account of GST on expenditure for O&M activities, even if these services were outsourced. It held that once it was established that the levy of a tax on services had an impact on the cost of or revenue from the business of generation and sale of electricity, whether directly or indirectly, a change in law had taken place and compensation must be paid.
Same old story
This type of behaviour from Discoms and state regulators – arbitrarily reducing tariffs, not paying for power and not honouring contractual provisions such as change in law relief – follows in a long and undistinguished line of bad Discom behaviour. As far back as 2013, Gujarat Urja Vikas Nigam Limited was pushed back by APTEL and then the Supreme Court when it tried to reduce solar tariffs unilaterally. Since then, similar actions have been reported in many states, including Karnataka, Andhra Pradesh, Uttar Pradesh, Jharkhand and Tamil Nadu. State Electricity Regulatory Commissions have regularly supported such illegal action. Not surprising, when regulators are often staffed by officers on deputation from the very Discoms they are supposed to stand in judgement over and act in accordance with the overt or perceived instructions of state governments.[*]
More recently, we have seen similar behaviour in Andhra Pradesh, pushed back by the courts. Punjab took this one step further, by introducing legislation to try and amend PPAs unilaterally to renege on tariffs legitimately determined through competitive bidding processes.
This bad behaviour by Discoms and less than fully objective regulators is however perfectly rational. They are struggling to stay afloat and the SERCs are their lifeguards. Discom finances are in terrible shape and they continue paying their bills late. The power they sell is more expensive and often less reliable. As a consequence, they are losing high paying commercial and industrial customers to independent power producers through open access at a rapid rate. Add to mix the insidious pressure they feel from vigilance authorities to hunt down every last rupee they could possibly save, until the last avenue of appeal is exhausted, however untenable their position might be.
So no surprises if the above decisions are appealed.
Consequences
Failing to respect the rule of law and to honour contracts threatens the fragile trust that exists between the private and public parties to them. When state-owned parties fail to do so, the rational response from private parties is to follow one or more of the following strategies, all sub-optimal for the growth of the power sector:
not enter into these contracts in the future;
bid higher in the future to account for the increased risk perception of doing business with the state; and
find ways to "manage the environment" if such problems arise in the future.
And of course there is no accounting for those potential market participants who chose not to invest at all as a result of such regulatory and contractual risks.
Postscript
As long as Discoms and regulators are capable of being influenced by their political masters, they have no incentive to change their behaviour. The solution lies in deep reform of the sector. This involves privatising the Discoms, paying close attention to the political economy and reimagining regulators and regulations to regulate for exclusively for market failure. Not an easy task but pathways to implement this exist, as discussed in a paper Ajay Shah and I wrote last year.
[*] For a history of such action, see: the chapter entitled Renewable Energy in D. Kapur and M. Khosla. Regulation in India: Design, Capacity, Performance. Hart Studies in Comparative Public Law. Bloomsbury Publishing, 2019. https://books.google.co.in/books?id=2tKIDwAAQBAJ.