‘Tata will emerge as the largest power distributor in Mumbai by year-end’

Compared with telecom, which is run on a day-to-day basis, in terms of constantly revising tariffs and talk times, power generation and distribution is more of a long-haul business, involving gestation periods of as much as 20-30 years and is very strategic in nature, says Anil Sardana, managing director of Tata Power. Still, these are exciting times for the power sector, he feels. Tata Power, for one, is in the midst of a massive expansion to increase its capacity multi-fold. True, with coal prices flying off the handle, uncertainty looms on the sector and many a player is expected to endure pain. Send them to us, a confident Sardana tells DNA in an interview, indicating the appetite for growth in the Tata group company. Excerpts:

A number of policy issues are still dogging the industry. A few developed countries have omnibus regulations that straddle sectors, leaving very little to doubt. Your thoughts on an omnibus Act...
There is a whitepaper the Planning Commission prepared sometime back, covering all regulations needed in the country. It covers the concept of omnibus regulations versus individual ones. It also compares countries which over a period of time have seen regulations evolving. We know very clearly that the US is one of the advanced countries when it comes to public utility regulations. They have moved away from omnibus and got into specialised regulations in which they have looked at stakeholders’ interests. The Planning Commission in India has categorised the work and tested it with our maturity of regulation vis-a-vis what the world has moved towards. It has given a roadmap, in terms of how India should work on protecting various stakeholders’ interest, both from development and customer point of view.

The major breakthrough in the power sector came through the Electricity Act, but it fell short of some major policy changes. Can you list some of the shortcomings?
One of the key subject matters associated with the Electricity Act is its applicability to different states. The subject, being in the concurrent list, guides the states to respond. In terms of providing a clear guidance in the areas of last mile, I think, it fell short. It does not mention anything about how a master plan for a town of a different category should address various energy sector related issues.

Can you elaborate?
Take for example a master plan for Bangalore, Hyderabad or Chennai. The development of the city has to evolve in 15 or 20 years. Does it give them guidance in terms of what percentage areas you must outline for setting up customer distribution networks and for setting up substations on the receiving end and the transmission end, or what we should do in terms of power generation if we have to create some sort of islanding concepts? It fell short in giving any guidance on those issues. This was one of the biggest missing links in the Act.

What do you mean by energy security?
A country should know how much nuclear energy should be generated in 10 years. Likewise, hydro energy and thermal energy generation also need to be quantified and so also renewable energy. Provincial governments today have no guidance on energy security needs. There has to be a guidance which links the states to the overall energy security needs of the country. But the country cannot meet its energy needs without importing coal or gas. China, for example, is importing. Even though they own a lot of coal, they are net importers of coal and gas. It is because of their energy security policy. India today needs that energy security concept.

Would it make sense to break up your businesses in Tata Power into different entities?
It is an evolving process. In every segment, if you grow to a point which can justify a business becoming a company in itself, then we can look at that. There are companies that have done that very successfully.

Will you do that? You are moving to become a 25,000 mw giant?
I think our size today is not that significant to do that. If any segment justifies it, we’ll certainly look at that. But what happens is in our business, there are many projects that get into an SPV (special purpose vehicle) mode anyway. For example, Maithon and Mundra are separate SPVs. Coal blocks are separate SPVs. They eventually merge into one single entity as part of consolidated accounts. In any case, they are not part of us in a day-to-day operation. Subsidiaries, divisions, separate boards, separate SPVs. Take Bumi Coal, or Mundra Power or Maithon Power, they have their own CEOs. By virtue of that, they have a separate governance structure.

Tata Power doesn’t have any plan in nuclear energy yet. Is it because the government is yet to come out with a clear policy?
2014 is when the government says it will come with a clear plan, segregating strategic and civil nuclear segments. As of now, they don’t permit more than 49% to private sector. Therefore, we’ll wait for 2014 for unbundling to take place and also for the government to amend the Atomic Energy Act to allow private sector to have a higher participation. Our participation will depend on how much the government will be open to that path.

Which segment in your business do you expect to grow the fastest?
The segment around thermal coal will grow the fastest. We will also like the consumer end of our business to grow faster. The unfortunate part is that none of the provincial governments is keen to open up that segment. They are all ducking around franchisee models, which means nothing in terms of how it meets the Act. It is ultra vires of the Act, because it doesn’t allow the consumer the advantage of capex or reduction in transmission losses. Many state governments are working on that. We are working along with the Planning Commission and the Government of India to have standard bidding documents, which are more open, ultimately benefit the customers and have a long-term sustainable benefit to make distribution more viable, efficient and customer friendly.

Would the gas come through Tata Petrodyne?
It could be through anybody. As far as we are concerned, our objective is to ensure that we have a basket of fuels over a period of time and have a balance.

The first phase of Mundra is almost ready. But the cost structure has changed drastically. What are the options before you?
There are two parts to this. This is the larger issue. We know that Coal India has said that we are going to have shortage in coal. To meet our country’s energy needs, we know that we have to move from 50 million tonne of imported coal per annum to 110 million tonne. If that much coal has to be imported, the government clearly has to have a policy to invite developers to do incremental capacity additions. My sense is that the government has to have a policy around promoting the use of imported coal and gas and compensate the developers for the rates.

Is Mundra viable at the moment?
No. At this moment, we have tremendous impact due to imported coal on Mundra because the price of coal has increased multi-fold. We have raised it before CERC (Central Electricity Regulatory Commission). In their evaluation, coal prices are expected to increase at 3.46% per annum. Instead, they have grown 131% since the time we bid, which is 5-6 times more. If it has increased so much, then neither CERC could visualise it nor anybody else imagined such a scenario. Nobody can visualise the price behaviour for a term of 25 years. We did everything possible.

At Mundra, we did contracts which were back-to-back. But if the country (Indonesia) decides to change its policy, we can’t help that. We can’t do anything beyond informing the concerned authorities on what’s happening on the price front.  We have contracts, we have ships, we have ports on both sides and everything was tied into a well knit option. We are helpless if the country decides to change its policies. Indonesia will not change its stance for Tata Power or for any other company. However, even if you take the present day rate of coal and make it a pass through, Mundra still continues to be one of the cheapest options among any bid power project. India has no choice because of its requirement of coal. So the Indian government has to come up with a policy on how it will compensate the companies importing coal. In fact, all the three countries exporting coal have changed rules in recent times. South Africa, Australia and Indonesia are in sync as far as exporting coal is concerned. India has to look at how to work out a formula for new projects as well as for existing projects. Otherwise, everybody will start reneging contracts. The country at this stage needs development, and therefore more power projects.

Has any state invited the private sector to participate in distribution?
Bihar has recently come out with franchisee agreements. Madhya Pradesh has come out with a proposal. There are states which are keen to look at this part.

The Maharashtra Electricity Regulatory Commission has said it will encourage Tata Power to build infrastructure. But your rival Reliance Energy has decided to levy charges for using their infrastructure...
It is just a distraction. It is in view of their customers coming at such a fast pace to us. The choice of change of distributor was given to both customers. Since the time this order came from Supreme Court, not one customer moved from Tata Power to the other side. Their customers came to our fold. We are not distracted and we’ll continue to offer a choice to the city’s consumers. By the year-end, we’ll emerge as the largest distributor in Mumbai. We are seeing at least 10,000-15,000 customers coming to us.

But why duplicate infrastructure?
True. Telecom companies share infrastructure such as towers, optic fibre and they even co-locate all the switches and data centres, etc.

Do you share infrastructure with Adanis in Mundra? After all they too import coal from Indonesia...
Yes we share the same port with Adanis. It is called the West Port, which has a base for them and us. We share coal handling infrastructure up to a point and even some roads are shared between us. Recently, I met the chairman of a power generation company and told him that we need to share spares. Why should we not encourage companies to store spares at different centres. When we are embarking on a tariff building exercise, the regulator should insist that spares should be shared as it will bring down the cost. I am not saying that capital intensive spares should be shared, but smaller items should and can be shared.

Of all the plants of Tata Power, which is the most satisfying?
It is obviously the hydro-electricity plants. They are more than 100 years old. It gives a sense of satisfaction when we go there as our team has been able to maintain them. I have started calling them our family silver. They need to polish them. So the least we have to do is to continue to maintain them.

Generating solar energy in your hydro electric generation sites could be a feather in the cap...
We will make it work. Our hydro segment has 25,000 acres of water surface. By October, we will know where we stand. We have an internal plan that by December-end we will have a complete feasibility study.

What’s the status on geothermal energy?
It is an area we are very keen on. We are well on schedule with our geothermal projects. The geothermal project in Australia is in the final leg of prospecting. The first phase of the geothermal project in Indonesia is done. It has given very positive results. Now, we have to do detailed work of drilling, which will happen in a few months. We are also looking at other countries in Africa where we could set up geothermal projects. We are also scouting for more properties in Indonesia and we are even looking at India as there are opportunities in Jammu & Kashmir and Gujarat. In India, unfortunately, there are no rules to regulate geothermal energy. We had approached the Gujarat government to allow us to do some prospecting in Kutch area. We were told that there were no norms for land allocation, etc. So we are waiting for norms to get established.

What potential do you see in geothermal energy?
Our business plan envisages a generation of at least 1,000 mw.
Tata Power has plans to set up power generation projects outside India. What’s the status?

Bhutan project will get commissioned by FY 2013-14 — around 126 mw. We are looking at more projects in Bhutan. We are looking at hydro projects in Sikkim. We are keen on a 800 mw project in Nepal.

Any plan to set up thermal power projects outside India?
We are looking at Africa and Indonesia. We are firming up plans. We have a gap of 8,000 mw, which will have to come from India and abroad. But we don’t have a break-up.

Another worry for power utilities is the rising interest rates? How prepared are you?
Interest rates, fortunately, are cyclical. Over the life of the project, you can assume they will be neutralised. Unlike fuel, which once you consume it, is gone, interest rates can go up to 13% but can climb down to 9%, too. So, over the lifetime of a project, it will not impact you as much. That’s the way it has been happening and we have studied this over the past and the trends haven’t changed.

But, for the present, will some of the projects be put on the backburner?
Why should it be so? As far as the capital can be sponsored and our equity is in place, then I don’t foresee a problem. We have the flexibility to lower the interest rate in the future. It has reset mechanism and we have the advantage of the reset clause. We have that flexibility.

Half of your consolidated net profits came from KPC. Will it continue this way?
The way the coal rates are, it will continue.