Why state electricity boards are facing a big crisis

Tata Power plunged into a loss of over Rs 1,000 crore for the year ended March 2012.
The company is battered by the huge provision for the 4,000-Mw Mundra power project.

Anil Sardana, managing director of India's largest private power producer, says though the tariff freeze by some states is causing tremendous stress, the company will go ahead with the expansion of the Mundra project.

In an interview with Shyamal Majumdar and Katya Naidu, Sardana also explains why he thinks state electricity boards are in the middle of a subprime debt-like crisis. Edited excerpts:

The Mundra ultra mega power project [UMPP] has proved to be a big drag on your balance sheet. What are your options?

We are doing everything possible like blending the fuel with cheaper Indonesian coal on which we get a higher discount.
Today, we are already burning 50 per cent of very low-grade coal - which is much more than our original plan. The plant load factor is 90 per cent. We have also asked for domestic coal as a solution. There are some other options as well.

You must be in a Catch-22 situation of paying a penalty if you don't supply and suffering huge losses if you do.

We have done a fantastic job in Mundra as far as project execution is concerned. But for the regulation change, you would have lauded us for doing this within the capital cost that we had promised and being ahead of schedule. We have always played it straight and can do nothing but exert moral pressure.

You have been talking to the government on the possibility of passing on the increase in costs. What has been the feedback?

Initially, when we took up the issue, we were told that we will make gains from the coal mine. It took us a while to transparently convince others that Mundra has to pay 100 per cent of the increase, but what we get is 30 per cent because we have a 30 per cent stake in the mine. In addition to that, there is royalty, income tax as well as withholding tax.

Along with coal costs, operation costs, like fuel for dumpers, also increase. It took a little time for the government to understand this; now it is taking time to come to a consensus on how to go about the issue. I guess we will have to be patient.

The second unit of Mundra will come up in August. What kind of stress will it put on your balance sheet?

The second unit is being tested and we are going ahead with synchronisation. We had announced that it would come up in August, but it will come up earlier. The stress will be quite a bit, though we have not arrived at any numbers yet.

Won't the stress force you to reassess your capacity addition projections?

We are still moving in the direction of adding 25,000 Mw by the end of the decade. Going by that plan, we are looking to add capacities here as well as internationally. We have looked at various geographies and we will invest in places where we get faster clearances for projects.

Our problem, as a group, is that we have a disadvantage over others in not being able to manage clearances. That perhaps requires a different art, one that we are unable to learn.

Your earlier plan was to add that capacity by 2017.

We have reworked our 2017 targets to 2020 targets. Earlier our targets included only generation. Now, we have incorporated resources and distribution, and made them holistic. We are waiting for our board to take a final view and will make an announcement on that soon.

Are you looking for more coal mines? If yes, then where? Are regulations easier in some countries than others?

We are looking all over the world. As far as regulations are concerned, all countries in Africa, Indonesia and Australia are in the same boat. Having resources in different geographies could de-risk our portfolio and the idea is to have a generation facility close to them.

In Africa, if you are looking at coal-based thermal projects, you should have resources close to them. Also, our plans for imported coal-based projects in India are very big. Between Trombay and Mundra itself, our requirement is above 15 million tonnes a year.

We are looking at more projects in the eastern region. Our plan requires anything between 20 million tonnes and 25 million tonnes a year and we need resources that can cater to this.

Will you acquire assets as big as your mines in Indonesia?

I don't think you can get such mines today. That's the world's largest mine. KPC [Kaltim Prima Coal] mines and Artumin are the largest thermal coal exporting mines in the world. Such mines come at peak valuations, if at all they do.

Will a lot of your new capacity be set up abroad?

The grass always looks greener on the other side. There are challenges everywhere. One has to wait and then conclude. It is not that states in India are not interested. We see some sense of urgency in them as well.

You are looking at domestic expansion despite the regulatory flip-flops?

We are running a very open race and will invest wherever the baton is passed faster and we win the race. Our position is not bound by geographies. The location will have to pass a three-pronged litmus test.

Our presence there should be relevant to the geography; it should meet our criteria in terms of fiscal qualification and hurdle rate; and the regulatory risk and law and order issues should be palatable.

Will you be interested in more UMPPs, especially the ones that come with a captive mine?

The advantage of a UMPP is that it comes with some degree of promise on clearances for land and other tie-ups.

The financial position of state electricity boards [SEBs] must be a huge cause for worry.

Discoms' [distribution companies'] losses, as a percentage of the nominal GDP, are likely to reach 1.2 per cent by March 2014 if reforms are not expedited in earnest. In power, there is a 10-year cycle. The first trough was in 1991, the second was in 2001 and the third in 2011.

What is bad is that we are not learning from the past. In 2001, we came to a very difficult point at which SEBs were not able to pay for power generation and, thus, we saw a period in which people started asking for federal guarantee. It's really bad that people were asking for escrow accounts backed by federal guarantees.

The other problem is the creation of close to Rs 50,000 crore of regulatory assets. [By definition, regulatory assets include previously-incurred losses that are in the nature of deferred expenditure and that can be recovered from consumers in future provided it is allowed by regulatory authorities.]

The huge regulatory assets on the balance sheet must be scary.

It is amazing how regulatory assets are allowed by law, but that's the reality today. What this means is that they have started printing notes that cannot be encashed by discoms today, and provide an accrual in the balance sheet for which there is no corresponding cash.

It is leading to an unfair, almost subprime-like situation in which one over-leverages and takes debt or credit based on the subprime. There is no clarity on who is going to pay for it.

You have been saying the Rs 88,000-crore loss at discoms in the five years to FY10 could have been turned to a profit of nearly Rs 8,000 crore. How?

This would have been possible had power tariffs growth been in line with household expenses. According to a study by Crisil, the share of energy expenses in Indian household expenses declined for the first time in two decades.

In the five years ended FY10, power tariffs grew at under five per cent a year whereas per capita income grew at 13.4 per cent a year, and household expenditure at 10.6 per cent a year. Indian power tariffs vary across states. Even though tariffs have gone up in some states in FY11 and FY12, further increases are critical to resuscitate discoms.

Data suggest that the consumption power of Indian consumers has improved significantly, but the tariffs for electricity are under-charged. The tariffs can be accordingly increased so that the system is able to tap into the consumption power to restore the sector's viability. Tariff growth was not held back by the consumer's ability to pay but by the inability of the system to tap this paying capacity.

Some tariff increases occurred in the last couple of months. Is that sustainable?

The right message is to control losses.