Power sector lenders to tell PM: Bring back regulated tariff regime

See it as a way out of impending bad loans as producers could not tie up sale pacts

State-owned power lenders Power Finance Corporation (PFC) and Rural Electrification Corporation (REC) plan to flag the issue of potential defaults by generation sector developers at a high level meeting called by Prime Minister Manmohan Singh.

At the meeting,slated to take place shortly,the lenders are likely to raise the issue of impending bad loans in the wake of the inability of upcoming generation project developers to tie-up power sale arrangements. As a way out,these lending firms,have,in the agenda note for the meeting,suggested a possible shift back to the regulated tariff regime as an alternative to the current norms prescribing competitive bidding as the mandatory route for power procurement through long-term PPAs (power purchase agreements).

In the note circulated ahead of the meeting of the chiefs of maharatna and navratna Central public sector enterprises called by the PM,the state-owned lenders have categorically stated that the generating companies are not able to tie-up the power sale agreements and that if PPAs are not executed,the borrowers shall not be able to generate the revenues and servicing of loans to financial institutions shall suffer resulting in the possibilities of bad loans. The worries on the generation side is despite the recent intervention by the Centre aimed at sorting out the accumulated losses in the distribution sector.

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The uncertainties on the fuel supply segment stem from a Prime Ministers Office directive issued earlier this year that makes it mandatory for power project developers to have long-term PPAs in place to qualify for getting coal linkages from Coal India Ltd (CIL). But in order to sign these PPAs,project developers have to participate in bids called by various state-level distribution utilities.

This process,though,has been held up as no bidding documents are ready,despite the fact that the Ministry of Power has made it mandatory since January 6,2011 for states to procure electricity through the competitive bidding route.

As a result,if developers do not have PPAs in place,no coal would be released to them. This,in turn,could bottle up power generation from these projects,leading to a potential payments default.

There is another challenge in terms of the pricing of imported coal. In the backdrop of faltering domestic coal supplies,the government is currently struggling to devise a foolproof method to ensure that prices of imported coal can be passed on in the form of tariffs by developers of upcoming projects,especially in light of the fact that the 25-year PPAs offer little comfort to project developers on account of the fuel risk over the entire period.

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A revision in the current set of standard bidding documents,which is in the works,entails a new bidding format for new projects based on a single variable the capacity charge or essentially the fixed-cost component with the first year tariff quote essentially deciding who emerges the winner in the bidding process.

As against the current model,where fuel costs form part of the quotes offered by developers at the bidding stage,fuel-cost is now proposed to be made pass-though,i.e. it would passed on to the consumer,with supervision of the costing aspect to be entrusted with independent engineers proposed to be deployed at thermal stations which,analysts say,could lead to an inspector raj.