Tata Power says APTEL order grants compensatory tariff

Contrary to the market's perception of an APTEL order that is said to have struck down compensatory tariff for Tata Power and Adani Power, Anil Sardana, MD of the former says the market has got it wrong and termed the order a "vindication" for the company."The pass-through of fuel prices has been permitted under the Force Majeure clause," Sardana told CNBC-TV18, adding that the tribunal has asked CERC to table rules for this.He clarified that while APTEL had indeed struck down the compensatory tariff under Section 79 (dealing with CERC's powers) but had accepted it under Force Majeure.Below is the verbatim transcript of Anil Sardana’s interview with Ekta Batra, Anisha Jain and Anuj Singhal on CNBC-TV18.Anuj: What are your first thoughts, this has come out of blue actually, the APTEL final order and the stock of course has reacted accordingly but do you plan to challenge it in Supreme Court now?A: I would up front say that perhaps people have not really understood the fine print. The order clearly states that the force majeure conditions has been accepted and that they have reverted it back to the Central Electricity Regulatory Commission (CERC), to do the tabulation within a maximum time period of three months. So, this is clearly a vindication, so, the pass through of the fuel prices has been permitted under force majeure which is a condition that we had even pleaded before CERC. However, at that time CERC had said that they would want to do it under the route of adjudication and sort of the powers that CERC has to remove the difficulty which was also fine with us.APTEL has taken more legal route that is why they took so much of time. They must have done all the research and they have awarded the order in our favour and said that the order is permitted under force majeure condition. So, this is truly a big win because for the asset which is been looking forward for the under-recovery to be taken care, we now look forward for the calculations to be done by CERC and in-line with the APTEL order.Ekta: Just to clarify this, the compensatory tariff for Mundra has been accepted under the force majeure condition and now it has gone back to the CERC which will be doing the calculations in terms of how much the quantum should be?A: That is correct. Compensatory tariff has not been accepted underlies the point that it has not been accepted under 79 provisions of the act which was the original order of CERC. However, it has been accepted under more legalistic aspect which is under the force majeure condition which was genuinely the condition on ground when under the force majeure once the Indonesia changed the law, all of us who were buying coal and had long-term contracts, got terribly impacted.Anuj: Are you saying that this is no negative at all and there is no need to challenge this order in Supreme Court?A: We haven’t got the order yet. It is based on what the sitting full bench announced in just about 10 minutes of their communication in which they have clarified that this order permits pass-through under the force majeure conditions. So, that is exactly what we wanted. So, if that is exactly what is written in the fine print, I think we are fine with it.Ekta: Just a little more details in terms of the legal aspects. You are not going to move the Supreme Court under what you are hearing? Based on what you have heard you are not going to move to Supreme Court but what is the chance of the discoms?A: Our lawyers have to go through the fine print of the order because we are told that it is a very huge compilation of the order. At the same time what they announced that they are accepting our plea under the force majeure condition and recommending to CERC to tabulate and calculate the amount, the revised tariff based on this provision of force majeure. That is what we are waiting for.Ekta: My follow up question was what is the chance of the discoms appealing against this?A: I guess all stakeholders would go through the details of the order and then we will have to then converge together and understand that if this palatable with them and with us then we stay course. If anybody feels anguished with this naturally then the next court of call will be the honorable Supreme Court.Anisha: We had seen that in the last quarter, you had reversed the impairment that you had done for Mundra and as far as the losses are concerned, they have been converging as well. Can you help us understand what was the exact under-recovery per unit for the Mundra plant and what is exactly that you were looking for from this compensatory tariff?A: We need to understand that the issue related to under-recovery is on a month-on-month (M-o-M) basis, but the issue related to the provision for impairment that we had kept is based on long-term capability of the asset to provide returns. Considering the fact that now, the prediction of long-term is that the coal prices will continue to be low, therefore, it gave us basically a situation and with the asset was able to stand on its own feet in terms of the fact that the losses will not be as much as the impairment had been done. And therefore, we had reason to reverse that.But, on the flipside, as you know, we have hedged investment in coal, since the coal prices become low, we therefore took impairment in the coal mines. So, the extent of this impairment stayed except for the fact that it got reversed in the Coastal Gujarat Power Limited (CGPL) as an entity which uses coal, but it got impaired in the coal mine investment where the coal prices lower would mean lower profitability of the mines.Anisha: As you said, it is going to go back to CERC wherein we will have the hearings again, so what is the timeline you are expecting that this can get resolved in? It has already been many years since this has been going on and the under-recoveries have just been piling up. The revenue has not been able to recognise, the outstanding is just increasing, what is the timeline you are looking at?A: Two things that the bench announced in their order that they dictated this morning. Number one, the maximum period given to CERC is three months. So, we can expect that the answer for CERC will be three months. I am not sure whether it will require any further hearings, because it is a matter of calculations. As you know, CERC had already done those calculations for their own compensatory tariff part, they have therefore have all the details with them and they will have to just make the calculations in line with what APTEL has told them.So, I am not sure whether any hearings will be needed and time period is in any case announced by APTEL as a maximum period of three months.Ekta: Would you be recognising the compensatory tariff in your earnings going forward then like your peer Adani Power has been doing?A: We will have to wait and see the orders. Once the papers come in and we go through the orders then we will be able to take a call on that.Anisha: What was the level of compensatory tariff that you were seeking and if you get that would you be able to break even or even generate profits because Mundra has been reporting losses and I was hearing one of the comments where it said that it has led to erosion of your net worth by nearly Rs 3,000-4,000 crore. So, if it comes through, would you be able to break even and what is the number that you are looking at as far as compensatory tariff is concerned?A: As far as the plea that we had made, it clearly stated that we were looking for the under-recovery to stop. We were looking at the fuel to become a pass-through in view of the changes that had happened in Indonesia as well as the prices that had changed. Now, that is what we have to go into details and see as to what exactly is the part of the force majeure coverage. So, that is one part.As far as making profit is concerned, one has to be clear that once the under-recovery on the fuel side is concerned, as far as the fixed cost element is concerned, we had not asked for anything different because we are fine with that fixed price. So, therefore despite the fact that ours one of the lowest cost at about Rs 0.90 fixed price, we are still fine with it, we have not asked for any change in it.We had only asked for under-recovery on the fuel side to be taken care of. As far as the pronouncement is concerned, it looks that part has been taken care of but we will have to wait for the final print of the order.Anisha: What was that under-recovery number that you were facing right now and what were your average realisations?A: At the present date prices, the under-recovery is lower. It is about Rs 0.30 per unit and that under-recovery will be taken care of.