Has power regulation come of age?

The messy and devastating Enron stalemate is not without its brighter side. It seems to have accelerated the evolution of power regulation in this country by exposing the regulators to pitfalls that they should watch for. Now we have the Andhra regulator sending back power purchase contracts for possible revision and asking some extremely uncomfortable but relevant questions?questions that hitherto went unasked merely because the electricity consumers on whom would devolve the entire burden of the contracts, lacked the constituency and a forum. A few days ago, the Andhra Pradesh Electricity Regulatory Commission (APERC) reportedly sent back a draft power purchase agreement (PPA) signed by APTRANSCO, the state-owned transmission company with an Independent Power Producer (IPP). The regulator apparently wants APTRANSCO to explore the possibility of effecting a reduction in the forex component of the project?s capital. The PPA, which has already received the Central Electricity Authority?s (CEA) techno-economic clearance had come up before the regulator for final approval. The project, a 520 megawatt thermal plant is being set up by BPL Systems in collaboration with Marubeni Corporation of Japan. The revised capital base of the project is reported to be Rs 2748.54 crore, of which domestic capital is only Rs 1,228.92 crore and the rest is to come from external sources. APERC now wants the foreign currency component scaled down substantially. APERC?s initiative flies in the face of the widely-held belief that only foreign investments can rescue the power sector from crippling capacity shortages. After all, the new power policy of the early nineties was premised on the assumption that domestic sources of capital would be grossly inadequate to meet the burgeoning demand for generation capacity and, therefore, the power sector will have to rely increasingly on foreign capital. The generous terms of the two-part tariff guidelines were justified on the ground that they were needed to woo reluctant foreign investors. The policy set no limits on the extent of foreign capital, in fact, the more the better was the general refrain then. The two-part tariff guidelines offer, inter alia, a 16 per cent return on equity, market interest on debt? both domestic and international?and frontloaded depreciation rates all of which translate into capacity charge in the tariff. While return on foreign capital is fully repatriable in foreign currency, so is the interest on foreign debt. But the tariff guidelines went one step further and made the power purchaser bear the entire exchange risk?a measure that has now come home to haunt hapless utilities like Maharashtra State Electricity Board (MSEDB) which went ahead and signed contracts with a huge forex content. To date, 57 IPP projects?both thermal and hydel?have obtained CEA?s techno-economic clearance and have considerable forex component in equity as well as debt. At least 27 of them have obtained CEA?s clearances for capital costs computed on an exchange rate of Rs 35-50 to a dollar or less. The BPL project in Andhra falls under this category. The highest exchange rate that has been cleared so far is Rs 42 to a dollar?in April last year. Since then, the rupee has been depreciating steadily to reach over Rs 47 and is still falling. There is no telling where it will be during the next 12 years which is when the debt component will get fully liquidated. The obligations of return on equity will continue through the life of the asset. According to one estimate, each rupee increase in the exchange rate sends the capital cost of the BPL project soaring by Rs 32 crore. This does not even include the escalation in project costs due to other factors. No wonder the regulator is concerned?it will have to perform the unpleasant task of allowing the escalation to be loaded on to the tariffs. After all, exchange risk, being a pass-through item, is borne by the consumers of electricity and the regulator will have no leeway in this regard. Is it not the exchange rate along with soaring fuel costs that sent Enron tariffs crashing through the roof? While MSEB could avoid incurring fuel costs by not drawing a single unit of Dabhol power, it has no way of escaping the hefty exchange risk costs which are an integral part of the capacity charge. The Andhra Pradesh regulator seems to have asked other inconvenient questions as well. For instance, it wants to know why foreign debt should not come at lower rates of interest than domestic debt. It has pointed out that the differential rates prevailing in the domestic and international debt market should be reflected in the power purchase agreement as well. Worse, the regulator has dared to question the need to pay 16 per cent return on equity?prompting IPPs to cry foul and our very own power sector pundits to cluck in sympathy and shake their heads in disbelief. But then all that the AP regulator is doing is to shake the SEBs out of their stupor. It has finally brought home the fact that the norms down in the two-part tariff guidelines are only ceilings and that it is incumbent upon the SEBs to try and negotiate better terms?something that seldom happened so far. What the regulator says may sound like heresy to those who have been chanting the mantra ?No power is costlier than having no power?. The day of reckoning is already here and, oh yes, some power can be costlier than no power, thanks to lessons learned from the Enron imbroglio. SEBs can no longer ignore this fact and go on signing contracts based on ceiling norms when the exchange risk is borne entirely by the consumer. They had better watch out now, else they might go the Enron way. The regulators now have a better instrument than merit order dispatch to discipline profligate SEBs. The AP regulator has used it and shown the way.