When defying regulators becomes a norm
Sep 13 2013
Across sectors, large players have used their muscle to get commercially enforceable contracts
But there are exceptions. Reliance Industries Ltd (RIL) is one. This Mukesh Ambani company seems to be a law unto itself. Its repeated failures to honour legally binding commercial contracts point to malaise in the system.
Like RIL, several other firms have questioned the authority of regulators and governments in states and the centre in telecommunications, insurance, electricity and equity and commodity markets.
RIL has trashed the directorate-general of hydrocarbon’s (DGH) directive to surrender unexplored parts of KG D6 gas fields, including eight discoveries with potential gas reserves of over $10 billion. Not only has the company offered lame excuses for not sticking to deadlines committed under the production sharing contracts, but questioned DGH’s locus standi in issuing such a directive.
RIL, the flagship company of a widely diversified group, cannot escape the commitments made under the contracts for gas output, pricing, investment obligations and timelines.
This is fourth RIL showdown with regulators and the government on oil and gas field contracts. It not only questioned the regulator, but went as far as to threaten the government with arbitration after being pulled up for the steep fall in gas output fined $1.8 billion. The company has given the excuse of ‘geological complexities’ to explain the output decline. DGH, a technical arm of the government, is yet to ascertain this excuse for production dropping to just a quarter of the commitment under the commercial contracts.
Will RIL operating in other countries be able to pull off such a trick on the regulators there in the same way? For example, will it have the gall to question the authority of the US government as it pursues huge investment plans in US coal assets?
Similarly, should the demands of Anil Ambani’s Reliance Power and Ratan Tata’s Tata Power for steep increases in the tariff for electricity supplied from the four ultra mega power projects they won between them be entertained? What then one has to make of the sanctity of commercially enforceable power purchase agreements entered into at lower rates? Does such sanctity exist or not exist?
If there is no such sanctity, then where is the use of international bidding for such power projects, which the two industry groups bagged by quoting rock bottom tariff? It’s a given that once a company has signed a power purchase agreement committing to a particular tariff, the fuel and other systemic risks are that of the developer. If that’s the case, then why should any policymaker or government entertain their pleas for higher tariff, considering and granting of which will be altogether outside the bidding process?
Power project developers are themselves holding the government and their own projects hostage, demanding a tariff revision.
At the time of bidding, the companies were fully aware of the fuel risks. And these risks were and are clearly of the bidders. Now, they are trying to shift these risks on to public enterprises like Coal India and Gas Authority. Their demands for pooled coal or gas prices are nothing but a perfidy to con the government and the people.
The Tata Power and Reliance Power sponsored proposal for pooled pricing of coal was rejected outright on the ground that it was tantamount to cross-subsidising their fuel costs by state-owned Coal India.
But their demand for pooled pricing of gas has now received the blessings of the power ministry. This will be to supplement the gas being pumped out by state-run GAIL or ONGC. But then again, will the state-run oil and gas companies be asked to share the fuel risks of power developers outside the commercially enforceable PPAs?
Also, power companies owned by government and private groups have routinely either flouted or opposed orders of the Central Electricity Regulatory Commission and state regulators on power rates. The regulators’ authority, independence and technical expertise have been ignored and defeat the very purpose of setting up regulatory bodies.
Again, for this very reason, power tariff reforms are stuck. As the political leadership has failed to take a call, regulatory bodies have been turned into toothless tigers which are being challenged by companies in different courts leading to inordinate delays.
Look at the stock market regulator, Sebi. Flagrant violations of its orders are evident in the deposit mobilisation of Subrata Roy’s Sahara real estate and housing companies. Here again, the Sahara group questioned the authority of the regulator to monitor its deposit mobilisation and order to Rs 24,000 crore to investors.
Most telecom companies have questioned the Telecom Regulatory Authority of India (Trai) orders on pricing, schemes and coverage of services. Trai’s stand on spectrum pricing has become a big bone of contention between it and the companies. This has led to a huge pile-up of appeals against the regulator’s orders in the telecom disputes settlement and appellate tribunal.
One must not forget the fracas kicked up by insurance companies on unit-linked investment schemes that fell in the overlapping domains of Sebi and the Insurance Regulatory and Development Authority. Cartels refused to sell pension products and Ulips for long time to pressure the regulators and finally succeeded in getting huge benefits in terms of higher commission at the cost of policyholders.
In sector after sector, large players have used their muscle and dominance in the market and money power to defy the regulators, bend rules or get around commercially enforceable contracts. And neither the government nor the regulators seem equipped to fight this.