Power Distribution Companies And Litigation Woes — Infravisioning With Vinayak Chatterjee

Vinayak Chatterjee: That’s the question that is often asked and it is popularly said in the power sector, that it is the discom tail that wags the power sector dog and the discoms have actually been the source of much friction on two sides vis-a-vis consumers when they raise tariffs and vis-a-vis their payments in time to the suppliers of energy.

So, the buyers of electricity have very little voice because it is the regulatory authorities that set tariffs and that is almost a semi-judicial process. What has happened to the generators is that they feel very suffocated, stifled, and frustrated with what one would broadly call as a dysfunctional commercial behaviour between the discoms and them.

If you speak to any power generator, whether it is traditional coal-based or global, they will tell you their woes vis-a-vis their interaction with discoms, how difficult it is to get a genuine cost passed through in a tariff or how difficult it is to get payments in time and also the payments which have been directed by various authorities like the state regulator because they always go out and the discoms traditionally go around challenging every dispensation handed to them by the judicial or semi-judicial system.

So, we finally have, as you rightly observed in the judgement that the Supreme Court gave in the case of GMR Warora Energy versus the Central Electricity Regulatory Commission and others. There are some very strong points that the Lordships have made.

They broadly fall into five categories, but there are two-three fundamental ones and the first one is that when there is a change in law, you know, all contracts between a supplier of power and a buyer of power, between a generator and a discom, has very strong legal contracts that sets out the roles, responsibilities and liabilities of different parties and it very clearly sets out that when there is a change in law.

For example, if the government imposes a green cess on coal or if there is a change in the taxation structure, the GST comes and replaces something else. If there are genuine facts that change the costing structure of the generator of power, which is a change in law, then the regulators who determine tariff are authorised to allow the costs whether they increase or they decrease, to pass through the system and end up as tariff to the consumers, so that the generators recover, the genuine cost increases.

The cost decreases normally do not happen, it is the cost increases that happen. For example, the government recently put a duty on the importation of solar modules from China and related countries. Now, when you put a 30% duty, obviously the cost of solar panels goes up and if the cost of solar panels goes up, the power supply by solar installation goes up.

So, these are issues which the generator has no control over and therefore it is logical as they affect the cost of producing power that gets passed through. The point I am trying to make is that whenever such an obvious change in law happens, the discoms instead of allowing an increased tariff, go around challenging it. So, the state regulator says yes, you can increase the tariff by x paisa, whatever by 50 paisa or so. Then the discoms instead of just agreeing and getting on with it, goes into a whirlpool of challenging that tariff increase.

Vinayak Chatterjee: Well, the jury, which is the most appropriate thing to say in today's programme, is that the Supreme Court has directed and advised, now is this going to change the discom behaviour? The expectation in the market is that it will because people will now start quoting this judgment and say, why are you going for a litigation, I mean, why don't you just follow what the regulator has said in terms of increased tariff.

The second point relates to the jurisdiction and it's a related point and the Supreme Court has also said that these are technical subjects with exact amount of compensation that is due in a tariff increase based on the increase in the price of domestic coal or change in law or change in taxation, these are very technical issues and therefore there are competent authorities like the Electricity Regulatory Commission and similar other bodies and these are technically qualified bodies to pronounce their verdict on such potential increases in cost and related tariffs. So, the Supreme Court said why are you bringing these cases to the Supreme Court.

So, this is the second point I made, the first one was, of course, a change in law, and the second is about jurisdiction, that the other bodies are fully within their rights to give dispensations, on tariff increases and take a view on costs, etc. Why should you be bringing this up to the Supreme Court. They have brought up the issue of jurisdiction also. 

Vinayak Chatterjee: There are two aspects to it. I will come to the pay first a little later. The more important point is there are two impacts on the cost to a customer. By litigating, the discom is accumulating charges for which it is not paying the generator in time, been integrated in time and once they are proved wrong, they are asked to pay up.

Then they have to be not only pay the charges, the payments they had held up, but also a surcharge or the late payments surcharge. Secondly, in the process, also accumulating huge legal fees. What they have been doing traditionally is using both the late payment surcharge, which is an additional cost, as well as huge legal fees, adding all of that and saying that this is the cost of doing business, so pass on that to the customer, as a tariff increase.

So, the Supreme Court says your behaviour, in constant litigating and delaying payment is resulting in increased tariff to the customer. So, you can't do that anymore. It's a very simple point. So that's the point that the Supreme Court is making that you can't do it anymore.

It further says, now coming to your second point, if a competent authority has said yes, Mr. discom, you have to pay this amount to a generator. The Supreme Court says you first pay, after that you litigate and if litigation is in your favour, you could always demand a refund. So that's the further step that the Supreme Court has added.

Vinayak Chatterjee: I have myself been a little surprised with this. So, what effectively my view is that the state gencos have fairly long-term PPS, you know, 25 years, 30 years and prices of yesterday were far higher. Since then, in a competitive market, prices tend to fall also because of the competition from renewables.

There is this anomaly that discoms in their commercial interaction with the private sector producers tend to be far harsher in terms of getting the best contracts and litigating far more with the private sector producers, than they do with the state generating companies.

So, this observation by the Lordships came as a surprise to many people who read the article and later called in saying this is interesting that we are even saying that there are certain, you know, underlying differences in behaviour commercially between the discoms interaction with the private sector and with central or state sectors.

Vinayak Chatterjee: That is true, and it wasn't always in fact, a few years ago, programmes like yours used to discuss how soon will renewable energy attain grid parity, which means how long will it take for them to match the prices of coal-fired generators.

Now we are talking about a reverse situation. We are talking about situations where renewable energy is actually working out cheaper than coal fired. So, it's leading to a lot of pressures and counter pressures in the commercial world of buying and selling power between the discom and a generator but the revelation where the Lordships illuminating to the extent that commercially, the discoms tend to be far harsher with the private sector players than with their state counterparts.

Vinayak Chatterjee: Look, I am going to read out a quote from the judgment for your viewers. So, the key point ultimately boils down to the court saying to the ministry of power. “The Ministry of Power may evolve mechanisms to avoid unnecessary and unwarranted litigation, the cost of which is also passed on to the ultimate consumer.”

So basically, the Supreme Court is now telling the power ministry that you issue the necessary guidelines, directives, whatever it is to prevent the discoms burdening the courts further with this kind of useless litigation that has been used in the past.

So, my view is now emboldened by the Supreme Court judgment, the power ministry should since the judgement is pretty fresh, April 20, my view is that the hands of the power ministry has been strengthened with this Supreme Court judgement, and I am expecting some very strong guidelines issued to the discoms to prevent needless litigation and from the Central Electricity Regulatory Commission, to also use this judgment to say that don't bring frivolous litigation.

I think this judgment should also be used by the civil courts, including the Supreme Court to actually not allow the cases to reach them for judgment, they should just say, it's not our jurisdiction, if the people have given you a final verdict, live with it. So, all these things are expected in the months ahead, but as I said, wait and watch this space.

Vinayak Chatterjee: It should not because the guidelines are very clear. If I promise free power, the discom gives it free and raises a bill on the state exchequer to compensate them for the free power.

Historically, what happened is that you gave the free power and then forgot to compensate the discom for it because the discom is not giving it free, it is a commercial entity. It is the political establishment that is giving it as an elected government to its people.

So, the state government has to compensate the discom for the subsidy that is built into the tariffs. So historically, the state government was very shoddy in paying up to the discoms in time. Even that area is getting cleaned up now with the very strong focus that subsidies have to be paid in time. So, if the movement is in that direction, it should be less and less worry for the future.