SEBs weak finances has made recovery difficult: Tata Power

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State electricity boards (SEBs) deteriorating financials have made recoveries difficult, says Anil Sardana, managing director of Tata Power .

In an interview to CNBC-TV18, Sardana says bankers may be forced to impose tough conditions or risk defaulting. Financially hamstrung SEBs aren't lifting enough output, preferring blackouts to expensive power "One of the suggestions was that the reform process which had started in earnest must be pursued and SEBs must show the right performance."

There have been concerns surrounding Tata Power's mines. He adds that coal production at KPC/Arutmin which together are the largest exporting mines in the world, should produce more than 75 million tonne of coal in FY12.

Below is an edited transcript. Watch the accompanying video for more.

Q: There have been a series of meetings that the Prime Minister and the Finance Minister have conducted with power companies such as yours. What specifically are the suggestions that have been put forth on SEBs and how to resolve that issue for power companies?

A: From our perspective, we have been saying that it's the SEBs which is the bulk purchaser of power and it's their health which is very important for all the projects to remain viable. We have had these situations in the past when people talked about guarantees and we are happy that we came out of all that and the project started to become bankable on their own.

But this kind of a situation where SEBs themselves are in tremendous loss will create a deep challenge for people to recover their dues. Therefore, many of the bankers may start imposing those tough conditions again. One of the suggestions was that the reform process which had started in earnest must be pursued and SEBs must show up the right performance.

Q: How does Tata Power stand with regards to meeting its coal requirements with specific reference to Bumi Resources in Indonesia?

A: We had tied up with Bumi as soon as we won the Mundra project. The interesting part was unlike many other projects, we did a complete back to back arrangement which meant that the way we had bid for Mundra we exactly did a back to back at the Bumi mines and all was going well until September 2011 when the Indonesian government changed the law.

Therefore, the deep discounted coal that was to come to Mundra couldn't come anymore and this is one of the issues that we have raised with the beneficiaries. We are expecting that they will be able to find a solution to the problem. Mundra is a fabulous national asset. In fact all those visitors who have gone and seen the project have found it to be state of the art technology. It's the first supercritical, first 800 mw project in the country and we have commissioned that.

From our side we are doing everything, we have now switched to low grade coal so that it comes at non-linear discounts, we are getting coal from our mines in Bumi and we are hopeful that once the solution emerges one will be able to see this 4,000 mw contributing to the national grid.

Q: There are other concerns for your investors which include delayed commissioning at Maithon and also delayed production ramp up at KPC mines. Can you take us through where things stand with reference to those concerns that investors have?

A: Maithon went off pretty well. We commissioned the first unit on time barring the transmission delays that delayed it by few weeks otherwise the project is doing very well. The first unit is generating full flat. Fortunately it's getting its coal from Coal India and the second unit is to be commissioned in February which is as per schedule again. I don't think investors should have any concern if at all they should feel good.

This is a unit that we actually moved from 500 to 525 mw rating and its stable since the very inception. Considering the fact that we had very high spurt in coal rates and also at this stage we wanted to automate the entire mine, we are very happy that all those projects have taken off very well. This year we plan to do more than 75 million tonne which is of large quantity. You should know on record that KPC/Arutmin together are the largest exporting mines in the world.

Q: How soon do you think the fuel cost issue will be resolved though because it impacted your margins in the previous quarter? How soon do you think there will be a resolution? What do you think the margins will improve back to?

A: This is a difficult issue because there are five beneficiaries to an ultra mega project. Since it's very difficult for five to come together and have consensus view, we have requested the central government which had actually taken the initiative of ultra mega to initiate a dialogue with these five beneficiaries and bring about a consensus view.

This is an industry issue plus the fact that we had done everything what was required for us to do in terms of back to back arrangements, if the change of law has taken place in those countries it requires a resolution. While people are empathetic to view, it could take a while. We are still going ahead with our plans, we are still going to generate as scheduled and we will hope the resolution will come in soon.

Q: We believe power companies also raised some objections to Coal India's new pricing format and now there is a new suggestion that has been put in place. What exactly will that mean for power companies such as yours and will that impact cost negatively for you or does it now stand neutral?

A: The formula that got changed from useful heat value (UHV) to gross calorific value (GCV) pushed up the prices in different categories of coal to different percentages. The category as defined by Coal India in different slabs got highly impacted on the higher category of coal which is the good quality of coal which typically doesn't come to the thermal power projects. The category that we use are the lower grades of Coal India which got less impacted.

Comparatively we had changes anything from 22% to about 45% or so. During the meetings that we had with the coal minister that they are aware of this issue and they have requested Coal India to review these prices and Mr Jha who is superannuating today - his statement was that since he initiated this change before he superannuates he will look at, review and correct these prices. So hopefully something should come out today.

As far as Tata Power is concerned we use domestic coal mostly in our projects in the eastern region, Maithon project and also our project at Jojobera in Jamshedpur. We have had that increase but as of now the power purchase agreement (PPA) allows us to pass that price through to our customers and to that extent to 3 paise impact that has happened in the mix of the coal that we have passed on to our customers.