The importance of a strong regulator and even-handed regulation cannot be overemphasised in a critical sector such as power which is faced with numerous regulatory issues holding back its development. Two recent moves of the Central Electricity Regulatory Commission (CERC), which regulates all central generation and transmission utilities and projects that sell electricity in more than one State, show that it is possible for a regulator to be practical and pragmatic while simultaneously protecting the interests of the consumer. Tata Power’s 4,000 MW ultra mega power project (UMPP) in Mundra that depends on imported coal has been facing an existential challenge ever since the Indonesian government decided to charge an export tax on coal — the company imports all its coal from Indonesia — which made fuel costs prohibitively expensive. This badly hit the economics of the Mundra project, the first UMPP to have been commissioned, because the company cannot pass on the higher fuel cost to consumers as per the norms on which the project was awarded. Tata Power had to take an impairment charge on its balance sheet last year and ironically, the state-of-the-art power plant, which was commissioned on schedule, converted a profitable company into a loss-making one. It is in this backdrop that the company sought CERC’s permission to pass on the higher fuel cost to consumers.
In what is a balanced decision, the regulator granted permission recently to Tata Power to charge a tariff of Rs.2.78 a unit, marking an increase of 52 paise from the originally contracted price. The regulator could have argued that the company should have anticipated such exigencies while bidding for the UMPP and on those grounds said no to higher tariffs. But that would have forced Tata Power to stop generation and cut losses and there would have been no winners. While the higher tariff will now cover most of the increased fuel costs for Tata Power, the final price is still affordable for the consumer. The regulator has also notified new tariff norms for the next five years for central generation and transmission utilities which aim to increase operating efficiencies and lower tariffs. For instance, the NTPC will find its incentives falling because the regulator has now linked them to capacity utilisation, which is a change from the current practice of linking them to the availability of generating stations. As a consequence of the new norms, tariffs could fall even as the generating stations are forced to improve operating efficiencies. The utilities may have to sacrifice a part of their margins in the short term but will stand to gain in the long term as a result of higher efficiencies.