How Adani Power Rajasthan Gains ₹2,500 Crore At Consumers’ Expense

Strange indeed are the ways of the some of India’s electricity regulatory authorities. An interim order issued by the Appellate Tribunal for Electricity (APTEL) in September 2018 had directed the public sector electricity distribution companies (discoms) in three cities in Rajasthan—Ajmer, Jodhpur and Jaipur—to pay ₹3,591 crore to Adani Power Rajasthan Limited (APRL) that owns and operates a 1,320-megawatt capacity thermal power plant in the state in Kawai town of Baran district. On an appeal by the discoms before the Supreme Court, the apex court modified the amount payable to a little over ₹2,500 crore in October 2018. The court order has granted rights to the Adani group company to claim this amount from the three discoms that are public sector companies owned by the Rajasthan state government by “passing through” tariff increases to the consumers of electricity.

The All India Power Engineers’ Federation (AIPEF), an association of engineers working in electricity utilities owned by the Union and state governments, had attempted to intervene in the proceedings, pointing out various issues that it felt were crucial to the case but were being ignored by APTEL. Its intervention was, however, rejected first by the Supreme Court in February 2019, and then by APTEL in an order issued earlier this week, on 27 May 2019. The federation had argued in its submissions before the apex court and the tribunal that the tribunal’s interim order cannot be justified.

The compensation to the private power generation company has been granted on account of higher costs of Indonesian coal that the Adani group imports to run the power plant. Higher tariffs have been allowed, curiously, on the basis of a judgement of the Supreme Court delivered in April 2017 by a bench comprising Justices Pinaki Chandra Ghose and Rohinton F Nariman that had expressly forbid compensating another power plant owned by the Adani group, namely, the one at Mundra, Gujarat, by “passing through” the higher costs of imported coal from Indonesia to electricity consumers.

How a judgement of the country’s apex court can be interpreted in two diametrically opposite ways for two companies in the same corporate group is a story worth telling.

APTEL’s interim order was given on an appeal filed before it by the discoms against a decision delivered in May 2018 by the Rajasthan Electricity Regulatory Commission (RERC) chairman Vishvanath Hiremath and two members, RP Barwar and SC Dinkar. The RERC had found that APRL was entitled to compensatory tariffs due to a rise in the costs of Indonesian coal due to a change in the country’s government policy in 2009.

In its 24 September 2018 order, Justice Manjula Chellur, Chairperson, APTEL and SD Dubey, Technical Member of the appellate body claimed that prima facie the facts of the case were in APRL’s “favour”  and ordered that 70 per cent of the total amount of ₹5,130.42 crore claimed be paid immediately to the Adani group company. This was appealed by the Rajasthan discoms before the Supreme Court, which in an order dated 29 October 2018, reduced the amount to 50 per cent, that is, ₹2565.21 crore.

The AIPEF’s intervention application argued that among several issues that the tribunal was ignoring, the most significant was that those very imports of coal by companies in the Adani group from Indonesia were the subject of an investigation by the Directorate of Revenue Intelligence (DRI), the investigative arm of India’s customs authorities.

The DRI had alleged that companies in the group, among other private and public sector companies, had artificially inflated the prices of imported coal by manipulating invoices and valuations.

The intervention application by the federation was first filed before the Supreme Court in December 2018 and rejected on 15 February 2019 on the ground that the AIPEF was seeking to intervene on a subject that the court had already ruled on in October 2018. Following this, the federation attempted to file the same intervention application before APTEL.

In an order dated 27 May 2019, the tribunal too rejected the federation’s attempt at intervention on the ground that this had already been rejected by the Supreme Court. The tribunal questioned the bona fides of the federation, claiming that the AIPEF had attempted to suppress this fact.

While the record suggests that there were indeed procedural issues regarding the federation’s attempt to intervene, the concerns raised by the AIPEF’s intervention application are of significance and merit consideration by the judicial authorities. It can be contended that the procedural complications in the federation’s unsuccessful attempts at intervention kept substantive issues relating to the case outside the bounds of evidence for consideration by the tribunal and court.

Good for Mundra not Kawai?

The case before the RERC hinged on answers to two important questions. The first question was whether while bidding to supply power to the discoms, APRL had relied on a domestic coal linkage or on imported coal from Indonesia. The second question was whether a change in the Indian government’s coal allocation policies constituted a “change in law” that directly affected the operatons of the Kawai power plant, thereby entitling it to compensatory tariffs under its contract with the discoms.

On the first question, the RERC found that the bid by APRL was reliant on a domestic coal linkage. The Commission relied on a paragraph in the Supreme Court’s April 2017 judgement by Justices Ghose and Nariman to determine that the Adani group company had indeed faced a “change in law” due to an amendment in that government’s coal distribution policy in July 2013. Back then, on account of a shortage in supplies of domestic coal, the government had decided that only a certain proportion of domestic coal allocated to different power plants would actually be supplied to them. The shortfall would have to be covered by imports with the difference in price between imported and domestic coal being “passed through” to consumers through tariff revisions.

The Supreme Court’s order had held that power plants that had been allocated domestic coal, and faced a restriction in their coal supply due to the July 2013 policy amendment, were due to receive compensatory tariffs and that this was relied on by the RERC to grant compensatory tariffs to APRL. A closer look at the facts of the case, however, reveals that both these claims are quite tenuous and legally contentious.

Commitment or Agreement?

The fact is that in August 2009 while Adani Power Rajasthan was bidding to supply power to three discoms from its Kawai power project, the company had submitted its bid on the premise of a domestic coal linkage and calculated its tariffs based on the prices of domestic coal offered by the public sector company Coal India Limited at the time.                                                                      

However, APRL did not have any domestic coal supply agreement (CSA) in place and the completed bid required that a CSA be attached. Thus, APRL had attached a CSA that it had signed with Adani Exports Limited (AEL) in June 2009 for purchase of coal imported by the group from Indonesia, and stated to the discoms that while the “primary” source of coal would be the mineral that is domestically mined, imported Indonesian coal would also be available as a safeguard against disruption in supplies of domestic coal. In support of its claim that it could secure domestic coal, APRL had submitted a memorandum of understanding (MoU) signed with the Rajasthan government in March 2008 for the development of the Kawai power plant, in which the state government had committed to “facilitate implementation of the project as may be required including making its best efforts to facilitate getting coal linkage/coal block from the Central Government or coal from any other source for the project.”

Faced with these supporting documents, the Rajasthan Rajya Vidyut Prasaran Nigam Limited (RVPN) which was conducting the bidding on behalf of the state government sought a clarification from APRL as to whether its bid should be evaluated on the basis of supplies of international coal or domestic coal. In response, APRL wrote a letter on 12 September 2009 stating that it was “sure” to get a domestic fuel tie-up with the support of the Rajasthan government and hence, its bid should be evaluated on the basis of domestic fuel. It was on this basis that the tariff offered by APRL was deemed to be the lowest. APRL was awarded the contract and in January 2010, the Adani group company signed power purchase agreements (PPAs) with the three discoms in Rajasthan for distributing electricity to Jaipur, Ajmer and Jodhpur.

Two issues stand out. One, despite its claim to domestic coal that was relied on, as far as the bid evaluation procedure was concerned, the CSA that ensured the bid was eligible to be considered was the one between APRL and AEL, which was based on Indonesian coal. This fact has been flagged in the AIPEF’s submission before APTEL, and was highlighted by the discoms before the RERC as well, to argue that despite APRL’s claims, the bid was in fact dependent on Indonesian coal. The second issue is that the change in Indonesian law that led to the increase in the cost of Indonesian coal by the time the bid was already submitted and was very well known to APRL. Still this had not been taken into account in its CSA with AEL which had been signed in June 2009.

On 12 January 2009, the Indonesian government passed the Law on Mineral and Coal Mining No 4 of 2009 that was designed to enhance the contribution made by that country’s mining industry to its economy. This law replaced the previous Mining Law No 11/1967 which had governed all of Indonesia’s pre-2009 mining concessions and applied to all existing arrangements. The new mining law eliminated several of those concessions, making it mandatory for Indonesian coal miners and suppliers to benchmark the price at which they sold their coal to the prevailing interntional market prices.

While the implementation of the law took over a year, it was clear from January 2009 to all stakeholders that a rise in the price of Indonesian coal was imminent. On 23 September 2010, Indonesia’s Minister of Energy and Mineral Resources promulgated the Regulation of Ministry of Energy and Mineral Resources No 17 of 2010, Article 2 of which required the holders of mining permits (and their affiliates) to sell coal at prices determined by the benchmark prices for domestic sales or exports. Existing coal supply agreements were required to be updated to reflect the new legal regime within a year. It was at this time that the actual escalation in the price of Indonesian coal took place.

In a red-herring prospectus issued in July 2009, a month after APRL’s CSA with Adani Exports Limited was signed, as APRL’s parent company Adani Power Limited went in for public listing of its shares on the Bombay Stock Exchange, the company disclosed the following information in a section titled “sources of coal for AEL” stating that:

“PT Adani Global, a wholly owned subsidiary of AEL, has entered into agreements to exclusively mine coal in Bunyu Island, Indonesia. AEL proposes to source coal from these mines in Indonesia. According to Pt. Mintek Dendrill Indonesia, the estimated coal reserves at these three mines is approximately 150 MMTs (million metric tonnes)…(with) an average GCV (gross calorific value) of 5,200 kcal/kg (kilocalories per kilogramme).

“While the counter-parties under the mining contracts for two of the three mines have procured long-term exploitation licenses to mine coal (for these two mines, an aggregate 1,000 hectare concession [was granted]), the third license has not yet been granted to the counter party under the third mining contract. PT Adani Global has also entered into a long-term contract with a third party to procure coal from Indonesia, and has undertaken exploration work with the objective of entering into additional mining contracts.”

Rajasthan Says “No” to Supplying Coal

APRL never got the domestic coal linkage that it had been hoping for for the Kawai power plant despite the fact that the Adani group is the mining operator for the Rajasthan government-owned Parsa East and Kanta Basan (PEKB) coal block in Chhattisgarh. APRL had requested the Rajasthan government in May 2008 to allocate coal from this mine to the Kawai plant, which was well within the Rajasthan government’s rights to do, as it was the coal block’s owner.

A series of reports by Nileena MS published recently in the Caravan has highlighted how this coal block remained in the Adani group’s hands despite the infamous scandal relating to the allotment of coal blocks—popularly called Coalgate—that had rocked the second Congreess-led United Progressive Alliance (UPA) government headed by Manmohan Singh and apparently in clear contravention of the September 2014 order of the Supreme Court cancelling 214 coal block allocations. The Rajasthan government, however, refused to allocate coal for this block to the Kawai plant—a fact that has been emphasised in the AIPEF’s intervention before the APTEL.

Instead, the Rajasthan government urged APRL to apply for a fresh coal block allocation from the Union government, which APRL did. The Rajasthan government wrote to the Ministry of Coal in January 2011 requesting the ministry to allocate coal blocks identified by the government in Chhattisgarh to meet the requirements of coal for various power projects in Rajasthan, including the one at Kawai. Receiving no response for over a year, in February 2012, the state government wrote to the central government again, this time to both the Ministry of Coal and the Ministry of Power requesting that the Kawai project be considered at par with other power projects in the Central government’s Eleventh Five Year Plan (2007-12), despite the project being part of the Twelfth Five Year Plan (2012-17).

In response, the Union Ministry of Power responded that the project was part of the Twelfth Plan and would be considered for implementation in due course. Meanwhile, the ministry suggested that the government of Rajasthan examine the possibility of increasing the mining capacity in the coal blocks already allocated to it in Chattsigarh and allocate coal for the Kawai project from these blocks. The Rajasthan government wrote back in November 2012 that there was not enough surplus coal in its allocated coal blocks without attempting to revise the quantity of coal it was recovering from those mines. In effect, the Rajasthan government, after having committed itself to securing domestic coal for the Kawai project, and after being asked by both APRL and the central government to supply coal from its own coal mines in Chattisgarh, was refusing to do so.

Thereafter, the Rajasthan government escalated its lobbying in New Delhi. On 26 November In 2012, a letter was sent by Rajasthan Chief Minister Ashok Gehlot to the Ministries of Coal and Power requesting ad hoc allocations of coal as the Kawai power plant was due to commence operations. The Rajasthan government wrote another letter to the Planning Commission in January 2013. In December 2012, the Kawai power plant started operating on imported Indonesian coal on a “test” basis, and was synchronised with the state’s power grid in August 2013.

In February 2013, APRL wrote to the discoms stating that the Rajasthan government’s persistent attempts to secure a domestic coal linkage had failed and that since the plant was running on Indonesian coal, the price of which had surged following the implementation of the Indonesian government’s new law, it would require a revision of tariff to compensate the private company for its higher costs on account of using imported coal. When the discoms did not agree to the revision suggested, the Adani group company went to the RERC.

Case at the RERC

At the RERC there were two issues that had to be decided. The first was whether the PPAs had been signed on the basis of the plant using domestic coal or imported coal. The discoms pointed to the CSA with a different Adani group company, Adani Exports Limited, based on imported coal that had been attached to APRL’s bid. APRL pointed to its MoU with the Rajasthan government, and the sequence of communications with the Union government seeking coal block allocation to establish that it had made a bonafide claim to the effect that the company’s original bid was premised on domestic coal despite there being no CSA for domestic coal being in place at that juncture.

The RERC supported APRL’s position and noted that domestic coal had been cited as “primary fuel” and imported coal as a “fall back support arrangement” in APRL’s bid. It also noted the MoU and the subsequent correspondence of the Rajasthan government and claimed that these substantiated the claim that the bid was based on domestic coal arguing that “while interpreting the contract, the subsequent conduct is also a relevant factor” and that “government of Rajasthan...[had]...vigorously followed (up with) the government of India for the allocation of coal.” The RERC brushed aside the discoms’ objections that the CSA that qualified the bid was of imported coal, a point that was repeated in the AIPEF’s submission before APTEL that was thrown out.

The next issue for the RERC was whether APRL had suffered on account of a “change in law” under the PPA with the discoms that would entitle it to compensation. Here, the RERC looked at the central government’s New Coal Distribution Policy of 2007 that had guaranteed “100 per cent” supply of coal used by power plants in India, including for future capacity additions. The RERC noted that the Union government had in February 2012 decided to stop issuing fresh letters of assurance for coal supply to power companies and in July 2013, had revised the coal distribution policy.

In the Supreme Court’s judgement of April 2017, in which the question of paying compensatory tariffs for the Adani group’s power plant in Mundra, Gujarat, due to escalation in the cost of Indonesian coal had been considered, the apex court had concluded that while changes in the law Indonesia cannot be considered a relevant “change in law” for the PPAs between Adani Power Limited and Indian discoms, the power plants that had been affected by the change in the Indian government’s coal distribution policy were due to be compensated.

The decision by the Supreme Court had been in the context of power plants like Mundra that had secured CSAs for domestic coal, that had to be adjusted due to the government’s amendments to the coal distribution policy. In APRL’s case, there was no such CSA in place, which the discoms pointed out. The RERC, however, disregarded this point, arguing that the “assurance” in the 2007 coal distribution policy and the subsequent unavailability of a coal linkage for the Kawai project constituted a “change in law” warranting compensation. As a result, the extra cost of the Indonesian coal would have to be compensated for.

The Supreme Court’s April 2017 judgement had contained the following paragraph:

“Nowhere do the PPAs state that coal is to be procured only from Indonesia at a particular price. In fact, it is clear on a reading of the PPA as a whole that the price payable for the supply of coal is entirely for the person who sets up the power plant to bear...It is clear that an unexpected rise in the price of coal will not absolve the generating companies from performing their part of the contract for the very good reason that when they submitted their bids, this was a risk they knowingly took...the risk of supplying electricity at the tariff indicated was upon the generating company.”

The Rajasthan Electricity Regulatory Commission, however, concluded that the risks involved on account of the private company’s costs of imported coal going up because of a change in Indonesian law, should be borne by power consumers in Ajmer, Jodhpur and Jaipur in the form of higher tariffs.

Balance of Convenience

The APTEL’s interim order is based on two elements: its prima facie assessment of the case being in APRL’s favour, and that the “balance of convenience” lies in APRL’s favour. Balance of convenience is a legal concept that attempts to balance the relief that one side will receive as a result of a judicial decision against the injury that will be caused to the other side. In its interim order, the tribunal determined that the balance of convenience lies in APRL’s favour, siding with its arguments against the discoms’ claim that they would suffer massive financial hardship. This is what has been written in the relevant portion of the interim order by APTEL:

“APRL is using costlier alternate coal such as imported coal, market based e-auction coal for supply of power. The discoms contend that the amount payable runs into more than 5000 Crores of rupees, which would break the backbone of business of discoms, who are already facing financial crunches. According to APRL, they have exhausted all available options for arranging the necessary working capital including taking support from group companies and additional working capital loans from banks and financial institutions.

“Since the hardship has continued for more than five years from May 2013, they contend that no lenders are coming forward to extend any further financial support. The present situation faced by APRL is not on account of their default but it is beyond the control of APRL..if the dues remain unpaid, it may lead to a situation where APRL would not be in a position to continue the operations, which would jeopardise interest of public at large.

“APRL will have to service its obligations to the lenders like banks and other financial institutions apart from losing revenue due to non-availability of power plant for generation of power. In view of Circular of Reserve Bank of India dated 12.02.2018, APRL is at risk of being declared as a Non-Performing Asset (NPA). It is evident that irreparable injury would be caused to APRL and not the discoms.”

Here APTEL has mentioned the infamous “February circular” issued by the Reserve Bank of India (RBI) which was responsible for the loans given by banks to several private firms being declared as NPAs and pushed into insolvency proceedings under the Insolvency and Bankruptcy Code. This circular was recently struck down by the Supreme Court in February 2019 in a case brought before it by power generation companies.

The AIPEF’s submission lists several reasons why it disagrees with this assessment of the balance of convenience. First, while comparing the discoms’ financial state with that of a company in the Adani group, the submission states that while the three public sector discoms in Jaipur, Ajmer and Jodhpur are incurring losses to the tune of between ₹11,000 crore and ₹15,000 crore each year, by way of contrast, in 2014, the Adani group acquired a power plant in Udupi, Karnataka, from the Lanco group for Rs ₹6000 crore and also took over Mumbai’s electricity distribution network from the Anil Ambani-led Reliance group in 2018 for ₹18,800 crore. These two acquisitions were an indication of the Adani group’s financial strength.

The second issue highlighted in the rejected application of the federation of power engineers relates to scheduling of power supplies. It pointed out that under the principle of “merit order operation,” electricity is first drawn from power plants that generate cheaper electricity. Based on estimates of power demand, a “merit order dispatch” is prepared every day for scheduling the power that will be drawn the following day, and how much will be drawn from each power plant connected to the grid is specified in this dispatch. In this case, the AIPEF added that the scheduling authorities in Rajasthan were bound to judge the power generated by the Kawai plant based on the tariff fixed in the PPA based on domestic coal, and accordingly, would draw large amounts of power from the plant.

The AIPEF submission argued that had the authorities known that tariffs based on the price of imported Indonesian coal would be applicable, the position of Kawai in the merit order dispatch would have been lower and thus relatively less power would have been drawn from it. This obviously cannot be corrected retrospectively. Hence, the AIPEF argued that the three Rajasthan  discoms would suffer additional losses due to “denial of merit order operation.”

Alleged Over-Invoicing of Imported Coal

The third issue of significance in the AIPEF applications relates to the allegations of over-invoicing of coal imported from Indonesia that have been raised against companies in the Adani group—among other companies—by the DRI, which these authors have covered extensively elsewhere. These allegations are the subject of a public interest litigation (PIL) petition currently pending in the Delhi High Court.

Following the rejection of the federation’s petition, in an interview with Newsclick, Padamjit Singh, chief patron of the AIPEF, asserted that these allegations of over-invoicing of imported coal are of considerable significance as far as his organisation is concerned. As for the alleged irregularities in the bidding process, he argued that these issues can be litigated after the investigation into the allegations of over-invoicing is completed. If the allegations are proved, the quantum of compensation that APRL would be entitled to—if granted by APTEL and the apex court—would be significantly reduced. Singh argued that until the issue was decided, the discoms should not in the meantime have to bear a high financial burden.

At present, the DRI’s investigation has run into a roadblock of sorts. The investigation agency has been seeking documents from the Singapore branch of the State Bank of India (SBI) relating to the Adani group’s mining operations in Indonesia, as well as documents relating to their import of coal to India. These documents, however, were denied to the DRI by the SBI. The agency then issued Letters Rogatory seeking help from the Singapore judiciary in the form of an order to the effect that these documents be made available to the DRI. The Adani group moved court in Singapore in an attempt to prevent this but lost its case in the Singapore courts. It was this juncture that the Adani group approached the Bombay High Court and managed to obtain a stay on the issuance of letters rogatory by the DRI. The DRI is appealing this decision in the Supreme Court.

Meanwhile, as we have documented elsewhere, the first completed case in the DRI’s investigation into allegations of over-invoicing of imported coal, involving a Delhi-based company named Knowledge Infrastructure Systems Private Limited, failed before the Customs, Excise and Service Tax Appellate Tribunal in a case in which multiple irregularities were alleged by the DRI.

Last year, The Wire reported that the former Governor of the Reserve Bank of India Raghuram Rajan had suggested to the Parliament’s Estimates Committee headed by Murli Manohar Joshi that a multi-agency probe was necessary to get to the bottom of the over-invoicing scandal. A PIL by the Delhi-based Common Cause requesting that a special investigation team (SIT) to be set up to take over the investigation is also currently being heard at the Delhi High Court. (Disclaimer: one of the authors of this article is a member of the Governing Council of Common Cause.)

Under these circumstances, the AIPEF’s plea of the issue of alleged over-invoicing of imported coal is pertinent before arriving at a final decision on whether or not the Adani group company should benefit from compensatory tariffs that are passed on to consumers who have to pay more for the electricity they consume. The Appellate Tribunal for Electricity and the Supreme Court of India have so far refused to consider this issue while questioning the credentials of the association of power engineers.

The AIPEF appears undaunted. Despite the rejection of its applications, Singh claimed that the federation would appeal before the country’s apex court as “the tribunal has completely gone along with the views of the Adani group’s lawyers.”

Conclusion

The April 2017 judgment by the Supreme Court––that had barred payment of compensatory tariffs to power companies on account of a rise in the prices of imported Indonesian coal and had emphasised the principle that the risk of changes in the costs of coal should have been taken on by companies when they chose to bid for the establishment of an electricity generation project and could not later be passed on to power consumers––had then been hailed by one of these authors as having “raised the bar for the Indian power sector.”

In the two years that have followed, this judgment has in our view been thoroughly undermined by the country’s power generating companies with the complicity of government authorities and regulatory bodies. The Gujarat government set up a panel to examine how the costs of Indonesian coal could still be passed on to consumers despite the Supreme Court’s order. The panel duly did so. These authors had broken the news of its draft formula which was recently ratified by the Central Electricity Regulatory Commission (CERC). Among the beneficiaries is the ultra-mega power plant at Mundra in Gujarat. Now, other power plants that also use Indonesian coal, such as the ones at Kawai in Rajasthan and Tiroda in Maharashtra, have been granted compensatory tariffs using the same Supreme Court judgment as a justification. Incidentally, all these three power plants are owned by the Adani group.

There is little doubt that if the compensatory tariff order of the RERC is upheld by APTEL, this case will also land up at the Supreme Court. Perhaps at that stage, the highest court of the land may get an opportunity to defend the spirit of its own April 2017 judgment.