It was in February last year that Jaiprakash Hydro Power Limited (JHPL) launched an aggressive advertisement campaign. Several news stories ran in the media after their executives addressed a number of press conferences in major cities. Indo Asian News Service did a story on 20 February 2005 indicating that Jaiprakash Associates Limited (JAL) was planning to float a public issue to raise Rs.5 Billion for Karcham Wangtoo hydro project in Himachal Pradesh. Soon after came an "Offer for sale" whereby JAL sought to offload 18 crores shares out of 49.1 crores shares of JHPL held by it, through 100% book building process by accessing capital markets during 22-29 March. The process completed with JHPL gaining visibility as its equity shares got listed and the selling shareholder, i.e. JAL, achieved liquidity.

What executives did not mention in their press briefings was that the Himachal Pradesh Electricity Regulatory Commission (HPERC) was still to determine the final tariff for the purchase of power from JHPL's flagship hydel project, the 300 MW Baspa II. The project was commissioned on 27 May 2003 and the power buyer is the state utility, Himachal Pradesh State Electricity Board (HPSEB). Further, the HPERC had suo moto challenged the supplementary agreement of February 2003 between JHPL and the HPSEB, an agreement where HPSEB had agreed to approve the capital cost of Baspa II at Rs 1550 crores.

The press was also not told that the conditional Techno Economic clearance granted by the Central Electricity Authority (CEA), almost 10 years ago, was for a much lower capital cost than actually was expended to complete Baspa II, and that the financial package (capital costs and sources of funds arranged by the promoters to meet those costs) is still pending approval by the CEA itself.

Ultimately, what investors did not know last February was that the 300 MW Baspa II project had been constructed and commissioned through enormous cost escalations, and power offtake by the HPSEB had also been ongoing, all in the absence of necessary approvals by the CEA. In the meantime, serious questions emerged on the long-term viability of the project itself, given that the state's regulatory commission had disputed the costing and had partly in line with that, not determined a final tariff. Without this, the certainty of revenue that would purportedly help JPHL settle its debts, has been hanging in doubt.

Prospective investors did not know was that the financial package had opened a pandora's box. There were prolonged negotiations with HPSEB between January 1999 and November 2002 on the unreasonableness of capital costs, interest rates on rupee loans and foreign currency loans, period of loans, financing pattern, equity raising charges, etc., stated in the package.

At the time of the "Offer of sale" of 18 crores shares in March 2005, the company had said on record in the Red Herring Prospectus that "the time for submitting the financial package was extended from time to time; the last extension was January 21, 1999. The Company submitted the financial package on January 21, 1999 to HPSEB as well as to CEA. Approval on this financial package is awaited."

Rewind

It all started with signing of the Power Purchase Agreement (PPA) between JHPL and HPSEB on 4 June 1997 for the purchase of power from Baspa II HEP for a period of 40 years, extendable for a further period of 20 years. The promoters had tied up funding from financial institutions including ICICI Bank, IDBI, IFCI, PFC, LIC, IIBI, Bank of Baroda, Punjab National Bank, Indian Overseas Bank, Central bank of India, State Bank of Travancore, State Bank of Mysore, State Bank of Indore, State Bank of Patiala and State Bank of Hyderabad in April 1995, with IFCI as a lead manager. However, disbursement of funds was subject to fulfillment of pre-disbursement conditions stipulated by financial institutes themselves, which included inter alia approval of project cost by HPSEB, GoHP (state government) and CEA.

The Central Electricity Authority had originally granted conditional Techno Economic Clearance on April 29, 1994, putting the estimated costs - including the Interest During Construction (IDC) – at Rs 949.24 crores. Two conditions that CEA stipulated were "signing of the PPA with GoHP/HPSEB and entering into agreement with Nathpa Jhakri Power Corporation (now known as Sutlej Jal Vidhyut Nigam) for terminating 400 KV transmission lines in Jhakri Switchyard." Another key condition to clearance was that JHPL submit the Firm Financial Package to the CEA within six months from the date of letter.

However, the company went on seeking extension of deadline for submission of Firm Financial Package several times, and at one or two occasions even missed communicating an explanation to CEA before the deadline. And the financial package that JHPL did submit to CEA on January 21, 1999 didn't actually have the consent of GoHP/HPSEB then, because, as noted earlier, negotiations were ongoing between JHPL and HPSEB.

In November 2002, negotiations were happening in the backdrop a volatile situation in Maharashtra. The Maharashtra State Electricity Board (MSEB) was refusing to offload the power from the controversial Dabhol power project. In the midst of this, HPSEB asked JHPL to make the best offer on the capital cost of the project for tariff determination. JHPL made the offer to put the capital cost of the project at Rs. 1550 crores arguing that "the estimated completion cost of Rs 1612 crores was appraised, approved and financed by Indian Financial Institutions, Public Sector Banks and buyers' credit from Export Credit Agencies; and the actual project cost as per the audited balance sheet was Rs 1667.34 crores."

In essence, JHPL was banking on its lenders -- the financial institutions -- for credibility on its costing. However this assertion of JHPL, which it also reiterated in the tariff petition to the HPERC, raises questions about the accountability of Indian financial institutions. While the pre-disbursement conditions stipulated by financial institutions themselves clearly specified against extending finances until the project costs were dully approved by HPSEB, GoHP and CEA, they went on financing the estimated completion cost of Rs 1612 crores. At least one institution, namely Power Finance Corporation extended a loan of Rs.170 crores. PFC falls under the Comptroller and Auditor General's oversight and any disbursement of funds in violation of pre-disbursement conditions could attract CAG's scrutiny.

India Together readers will remember a similar violation of pre-disbursement conditions by Power Finance Corporation in extending loans worth Rs 100 crore to Shree Maheshwar Hydro Power Corporation Limited in the case of Maheshwar Dam, which attracted severe criticism from none other than the CAG. Writing about how the costs skyrocketed in the case of Gerusoppa Dam in Karnataka, I had also referred to the need of CEA taking stringent action against routine violation of conditions for Techno Economic Clearances.

Ultimately, HPSEB gave an in principle approval to JHPL's financial package with approved project cost of Rs 1550 crores and the same was sent to the CEA by the GoHP in December 2002, with recommendation for central approval. Subsequently, as noted earlier, HPSEB and JHPL signed a supplementary agreement, which the state regulator HPERC then challenged, taking the view that the cost of the project remained subject to 'check of prudence' and 'due diligence' on its part.

In its order dated 6 September 2003, HPERC asked JHPL to file its tariff application within fifteen days of the grant of approval to Firm Financial Package by CEA and the supplementary agreement, whichever is the latter. In other words, HPERC said it would not proceed with tariff determination without the CEA's clearance. In the same order, it directed HPSEB to pay JHPL for Baspa II power at the effective rate of Rs 2.09 per unit, pending the determination of final tariff. For the six months period that ended September 30, 2004 JHPL has received payment at Rs 2.25 per unit.

Current situation

On 21 November 2005, JHPL attempted to set in motion a long pending process by filing its tariff application with the HPERC. The state regulator's admission of this tariff application raises questions on whether it has suddenly been infected with amnesia. Clearly, in 2003, the regulator was only willing to entertain the tariff application after the CEA approved the costing. The fact remains that the CEA had not accorded approval as of the end of 2005. The CEA website is conspicuously silent on the reasons for not according approval to the financial package. (See: CEA status document, PDF)

JHPL advertisement published in The Hindustan Times, 8 February, 2005.

Just over a month ago, on 31 December 2005 and 7 January 2006, JHPL published a public notice in the local dailies (Amar Ujala and The Tribune) announcing the filing of its tariff application before HPERC.

The company now says that the project's total revised cost is Rs.1778.17 crores (an increase of 87.33% over the original costs in about 10 years). This is also higher than what was agreed on by HPSEB in the supplementary agreement in February 2003, that HPERC had disputed. The capital cost claimed is important because capacity charges included in the tariff application include interest on outstanding loans, depreciation (and advance on depreciation). Also, capital cost is the basis for a number of other components of tariff, including Operation and Maintenance expenses (1.25% of capital cost, with 6% per year escalation for ten years).

South Asia Network on Dams, Rivers and People (SANDRP) raised several questions on the reasonableness of the project's costs at a press briefing at Shimla on January 28, 2005. SANDRP is a Delhi based non-government organisation working on policy issues around dams and publishes a news magazine called Dams, Rivers and People. Drawing public attention to the tariff application, SANDRP argued that the escalation of costs claimed by the company are not justified and should not be allowed to be passed on to the consumers as the costs have increased due to reasons of mismanagement by the company. SANDRP said that the company had charged additional costs including higher than approved capital costs, costs due to damages due to floods in July 2005, costs due to delays due to floods in Sutlej in July-August 2000, costs even when company has not produced capacity power (e.g. in 2004-5), additional incentives for plant availability over 90%, and incentives for production of secondary energy.

JHPL is also applying a 16% guaranteed return on equity. According to the open access system now in place, private producers should be free to sell power to whoever is ready to pay the higher price. There should be no obligation for the state electricity boards (SEBs) to buy all the power from them and also to guarantee 16% ROE or any such norm. According to norms laid out by the Central Electricity Regulatory Commission (CERC), hydel projects can be allowed 14% ROE, so 16% is higher by that token.

On charges due to damages from floods: Credible, verifiable evidence is not available to indicate that the damages occurred to Baspa II were unavoidable and the company had taken all necessary steps to prevent damage to its plant from such floods. So the company does not appear to have a case to get these costs from HPERC's final tariff. Moreover, one way to reduce damage due to floods and land slides is to ensure that protection measures like catchment area treatment (CAT) are commissioned before the project is completed. That is not the case in case of Baspa II, as the CAT remains unimplemented even today.

Also, JHPL's Red Herring Prospectus as well as the tariff application refer to a shocking Enron/Dabhol-like clause under which an amount for "Deemed generation" is payable in a number of possible situations including, if there is less water in the river and if the project is unable to generate designed power "due to water spillage due to reasons beyond the control of JHPL." This is shocking because the company is assured full power generation tariff even if there is less water in the river or if there are floods in the river, causing spillage from the project. (The reference to the clause is derived from the PPA, which is not public.)

As noted earlier, JHPL has yet to complete the catchment area treatment plans that were required to be completed before commissioning of the project, a serious lapse that could attract penalties in itself. In July 2005, Baspa project authorities opened the dam gates to flush out silt without any advance warning to the people downstream. The sudden release of river water led to destruction of life and property in the Karcham and Sangla downstream areas. On 2 November 2005, Chief Minister Virbhadra Singh announced that the state government would constitute a committee to inquire into the cause of floods. This lapse could also attract penalties for JHPL, under the Indian Penal Code for inflicting damage to public and private property. Still, the HPSEB and HP Pollution Control Board remain silent spectators. In the meantime, JHPL goes about claiming additional costs in the tariff application due to damages from such events.

The tariff application now awaits the HPERC's disposal. The regulator's process gives citizens a chance to file objections within one month from the date of the public notice by the applicant. JHPL published a public notice on 8 January and hence 8 February became the last date for objections. But while JHPL has made its application public on its website, it has not placed the annexures online. Very key documents like the Power Purchase Agreement and the supplementary agreement are said to be annexed with the tariff petition, but they are not put up on the JHPL website. Without the full disclosure of all the annexures of the tariff petition, informed responses from citizens are not possible. HPERC must ask JHPL to disclose all the annexures and extend the deadline of submissions of objections appropriately.