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Q. Supreme Court ruling on compensatory tariff: Comment on apex court ruling on compensatory tariff imposed by power manufacturing companies.
Apr 14, 2017 Related to : GS Paper-3

Ans :

Introduction-

The Supreme Court of India recently set aside an Appellate Electricity Tribunal decision allowing power generator giants Adani Power and Tata Power to charge compensatory tariff from their consumers spread across States including Gujarat and Haryana. The ruling wil likely weaken the financial positions of both power companies.

Background-

  • In 2010, the Indonesia from where these companies source coal to their power plants has raised coal prices at par with international market prices. Earlier Indonesia was charging less prices since last 40 years.
  • With increase in coal prices, these companies have raised their tariff as a compensatory measures and Appellate Electricity Tribunal has uphold this decision of power companies.
  • But recently the Supreme Court has set aside the Appellate Electricity Tribunal decision and held that a change in Indonesian coal export regulations does not measure up to be a force majeure event for which the consumers have to compensate for.

Analysis-

  • The Supreme Court ruling against grant of compensatory tariff for Tata and Adani Power companies in the wake of an unforeseen, policy-induced jump in Indonesian coal prices is blow to business sentiment in the country.
  • While delivering the verdict court relied on sanctity of contract, that the power purchase agreement between the power producers and assorted distribution utilities must be honoured, regardless of changes in fuel prices.
  • A power producer can control the cost of making a plant available to generate power, but has no control over the cost of fuel over the project’s lifetime.
  • The apex court is insisting the companies to sell power at previously agreed price that does not cover cost, will leads to losses, which in turn creates the loans they have taken from banks into non-performing assets and finally get liquidated.
  • Hence many are arguing that such judicial decisions which keeps blind eye to the commercial consequences of its actions, will not be benign for the economy affects the investment in our country.

What’s next-?

Now the apex court has referred the matter back to the electricity regulator. Hence regulator should come up with a commercially viable solution, even if that involves a rise in the tariff to accommodate higher fuel costs, else companies will become bankrupts.

Conclusion-

In case of power purchase and selling agreement with the government agencies the prices have been fixed at initial point only. Though aspects related to manufacturing comes under direct control of power manufacturing companies, but they cannot control the prices of raw materials. In this background the decision of apex court is blow to the business community, hence Supreme Court should consider the economic viability for companies before delivering any such ruling.


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