Tata Power lines up state deals to link Mundra tariffs to fuel costs

States move toward fuel-linked pricing

Tata Power is working toward supplementary power purchase agreements with Rajasthan, Maharashtra, Punjab and Haryana so it can charge tariffs tied to fuel costs from its Mundra station in Gujarat. A deal with Gujarat is already in place, and the company aims to bring the remaining states on board next.

On an earnings call Wednesday, CEO Praveer Sinha said, "We are working closely with all of them to get these things finalized." He added, "We expect at least two more states of Rajasthan and Haryana to sign before December end."

Why Mundra's tariff model matters

Mundra runs on imported Indonesian coal, and when Tata Power won the bid in December 2006 it agreed to supply power at a fixed rate. Indonesia's 2010 shift to peg coal prices to global benchmarks pushed costs up, turning that fixed tariff uneconomic. The squeeze left the plant operating below capacity for years.

Court battle in Singapore and a profit surge

After a ruling there upheld an arbitration award of $490 million against the company, Tata Power filed an appeal with Singapore's Supreme Court. The case, involving Kleros Capital Partners and an agreement connected with a Russian coal asset bid, is listed for hearing on Jan. 19. The Singapore International Commercial Court dismissed Tata Power's objections, including its claim that the majority award violated principles of natural justice.

The Mumbai headquartered utility posted net profit of 13.7 billion rupees for the July to September quarter, equal to $146 million, rising 49% from a year earlier. Sinha said the rise stemmed from a surge in power demand as the monsoon underperformed and a heat wave gripped the country.

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The bottom line for your portfolio

Fuel aligned tariffs at Mundra would reduce margin volatility tied to coal swings, while the Singapore appeal remains a legal overhang. Set against that, demand driven earnings strength gives Tata Power some cushion as it negotiates with states and presses its case in court.

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