Enron lessons for NTPC

But first, what is the Enron deal, and what are the NTPC concessions? Bro-adly, the crux of what8217;s wrong with the Enron project is that the Maharashtra State Electricity Board has to pay Enron for 90 percent of the power it can produce, irrespective of whether it actually consumes that power or not. While that seemed all right when the deal was initially inked many years ago, the demand for power in Maharashtra is today nowhere near what was initially projected. So, the MSEB has had to ask cheaper power producers to stop supplying it power on many occasions, since it had to pay Enron for 90 percent of its power supply capacity anyway.

NTPC, it should be clarified, does not have such take-or-pay8217; contracts. But what it has is also pretty terrible. The story begins with the Central government deciding that all power producers would be guaranteed a 16 percent return on equity invested by them. Now, at a time when the overall capacity utilisation of power producers was very poor, the government said that if any plant operated at even a mere 68.5 percent capacity for private players, and 62.7 percent for NTPC, they were entitled to get this 16 percent return. And if they operated abo-ve this, subject to a ceiling, plants were given a higher return so at 85 percent capacity, a plant could get a return on equity of upto 27.5 percent.

In January this year, the newly-appointed CERC pointed out that the earlier rule of allowing a full 16 percent return at low capacity utilisation levels had to be done away with. It had discussions with various people, reviewed availability data, technical improvements in the field, and so on, and ordered that a plant would not be entitled to any incentives unless it was available8217; or could produce power at at least 80 percent capacity.

This Availability Based Tariff order of the CERC, at one stroke, implied that NTPC would lose around Rs 800 crore of incentive payments it got. NTPC filed a petition asking CE-RC to review its order. First, it said, this order didn8217;t apply to private power producers and so discriminated against NTPC. Second, the figure of 80 percent was arbitrary, especially since an expert committee had put this figure at 70 percent just two years ago.

So how valid are NTPC8217;s argume-nts? Clearly, discrimination8217; is a non-starter. For one, the CERC8217;s jurisdiction does not include independent power producers IPPs this is the jurisdiction of state regulators. If, however, an IPP located in Punjab supplies power to Haryana, that is across a state boundary, then CERC8217;s writ applies. So where8217;s the discrimination by CERC? In any case, in certain cases, NTPC can theoretically get a higher return than the IPPs since their equity structures are different. An IPP8217;s equity is typically 30 percent of the total project cost, while in the case of NTPC it is assumed that its equity is 50 per cent. So, IPPs get a 16 percent return on 30 percent of the project cost, NTPC gets it on 50 percent.

More important, data submitted by NTPC itself to the CERC shows that in the last 5 years, its coal-based plants operated at a 76.6 percent capacity, and were available8217; 81 percent of the time as per the current rule, NTPC got paid for this 81 percent availability. Over the last couple of years, NTPC8217;s gas-based plants also operated at close to 80 percent, except for Gandhar which didn8217;t have adequate gas supplies. NTPC could have asked CERC to deal with Gandhar separately, but by asking for the entire benchmark to be lowered to 70 percent, it is essentially trying to ensure that it gets Rs 800 crore annually as incentive8217; for outstanding8217; performance!

The closest parallel to such dishonesty is what Air India began doing some years ago. Under pressure from its unions to raise salaries, the loss-making airline began giving them performance-linked incentives. Pilots, support staff, just everyone you can think of, got incentives flying more, flying on time more often, and so on. Great, but to ensure that the unions got more money without having to put in too much more, the performance base-lines were lowered from the actual performance over the previous few years!

Consumers would be well advised to pay close attention to this case, to ensure that NTPC isn8217;t allowed to get away with blue murder. And yes, NTPC8217;s right that IPPs are still being allowed to get away with unfair benefits. So, let8217;s ensure state regulators are put in place quickly, so that consumer interests can be looked after there as well. Let8217;s not get short-changed.