The Indian Power Sector

The Situation

An Indian state government argued that a "comfort letter" committed the purchaser of an electric distribution company to fund the purchased power costs that the distribution company venture owed to the State energy supplier. The distribution company's new owner disagreed. The dispute was referred to an arbitration panel, which sought a compromise between the state and the purchaser of the distribution company.

NERA's Role

NERA was retained to offer testimony before the arbitration panel on the fundamental premise of structural reform in the power sector, which included a commitment to the commercial operation of the sector in order to attract private investment. NERA's experts noted the numerous ways in which the government and the regulator had defaulted on their obligations, including the failure to provide compensatory tariffs, to pay their own bills, and to employ the state police powers against theft and intimidation. NERA also pointed out that the government was essentially arguing that the investor had agreed to fund operating losses through equity contributions, which would be a highly uncommon business practice. If accurate, the government’s argument would pierce the investor’s corporate veil, an occurrence that was highly managed through the layers of subsidiaries that the corporation had established.

The Result

Based on NERA's arguments, the arbitration panel ceased looking for a political compromise and began pursuing a ruling based on the issue’s business and legal merits.