NEW DELHI: The power ministry is considering issuing an advisory to electricity regulators asking them to abstain from lowering tariffs of stressed power plants that change hands as part of lenders’ resolution mechanism. 

The move, followed by a softened Reserve Bank circular issued on Friday, is aimed at immediately lifting investment sentiments in the stressed power sector and help banks in completing resolutions quickly. 

A senior government official said the ministry is likely to consider issuing the advisory to regulators for immediate relief to projects bid transparently in or outside insolvency court. A provision is also proposed to be made in draft tariff policy, which will require cabinet nod. 

This is the first time the Centre will intervene in clearing hurdles in way of resolution of stressed assets even as revival proposal for many such projects including steel and cement plants are facing various regulatory and legal challenges. 

“Renegotiating tariffs by amending power purchase agreements (PPAs) when a stressed project is sold has become a concern. Such efforts could impair resolution of stressed power plants as new investors will lose incentive to buy projects. The Centre may look into the issue and if need be issue an advisory to regulators for speedy resolution of stressed power projects, till the time a permanent provision is made in tariff policy,” the official said. 

The concerns stem out of the fact that of about a dozen power projects in resolution process since last one year only one could get through, only to hit a roadblock at regulatory stage. Tata Power and ICICI Venturesbacked Resurgent Power had in November announced acquiring 75.01% stake in Jaiprakash Associates’ 1,980 MW Prayagraj power plant, in first of the stressed power plants proposed to be resolved by lenders outside insolvency court. 

The process, however, ran into difficulty after the Uttar Pradesh electricity regulator asked Resurgent Power to cut tariff from the plant by 40 paise due to decrease in debt. The matter is now with the Appellate Tribunal for Electricity (Aptel). 

Power companies and bankers are worried that this can set a wrong precedence if regulators ask for tariff reduction in more projects. Industry sources said about 5-6 stressed power plants including GMR Energy Chhattisgarh, RKM Powergen, RattanIndia Amravati and RattanIndia Nashik can be settled outside bankruptcy court, while many other plants are likely to be resolved through insolvency code. 

“"Stressed power plants are fetching much lower valuation than their potential value in view of the systemic constraints. Regulators need to recognise that these are not freshly bid projects. Banks have stepped into the shoes of a promoter to save a beleaguered project, other things remaining constant. In the transaction for these stressed projects “ Tariff “ as stated in PPA is centric to valuation and sustainable debt . Therefore any regulatory adventurism to reduce tariff knocks away the main plank on which the transaction has been finalised. The power ministry, needs to ring fence projects being transferred by banks to new owners from any regulatory intervention," said Association of Power Producers director general Ashok Khurana. 

Private power companies and lenders sought the government intervention in keeping regulators out of the paperwork for stressed assets under resolution. The companies said the limited interest in power sector for companies with handful of companies with deep pockets will be wiped out unless the regulators are kept out of the approvals. 

An official in Uttar Pradesh government, however, said the tariff has to be determined on reduced cost as was done in the case of NTPC’s acquisition of Tanda power plant in Uttar Pradesh. PPAs of Prayagraj Power were signed on cost-plus basis in Uttar Pradesh’s former Bahujan Samaj Party-led regime. 

The Electricity Act, 2003 provides that regulatory commissions should adopt power plant tariffs if it has been determined through bidding or reject the application with reasons recorded in writing. It directs the commissions to issue tariff orders on commercial principles and keeping in view factors which encourage competition and optimum investments. The tariff fixation has to be guided by the National Electricity Policy and tariff policy.