(Adds quotes, details, context)
By Matthias Williams and Nidhi Verma
NEW DELHI, April 4 (Reuters) - India's Haryana state will challenge this week's ruling by the federal power regulator to allow Adani Power to raise tariffs for electricity in two states to compensate for the rising costs of coal imports forced by domestic shortages.
The Central Electricity Regulatory Commission (CERC) on Tuesday allowed Adani Power to charge more for electricity from its Mundra plant to existing clients in the states of Gujarat and Haryana until conditions improve.
The regulator said the tariff was fair given the damage to the sector caused by the rising cost of imported coal from Indonesia coupled with the shortage of domestic supplies from state-run Coal India Ltd.
The decision was welcomed by Indian power companies, but also immediately raised fears of legal disputes that could ultimately hurt, rather than help, the sector's recovery.
"Yes," said Haryana state Power Minister Ajay Yadav on Thursday when asked whether the government was planning legal action.
"Because we have signed an agreement with them (Adani). We will make the payment as per the rate at which we have signed the agreement," he told Reuters by phone.
Asked whether Gujarat would also challenge the order, state energy secretary D.J. Pandian told Reuters: "All options are open."
A spokeswoman for Adani Power declined to comment.
Adani's shares rose by nearly 15 percent on Wednesday after the regulator's announcement. Adani called it a "landmark" order that would restore investor confidence in the power sector.
Tata Power Company Ltd, which has a similar case still pending with the regulator that could be heard within days, said the order would revive several under-utilised or abandoned project proposals.
But even before the Haryana minister spoke to Reuters, some were concerned the ruling would bog energy contracts down in the courts.
"Our initial checks suggest a hardline stance by stakeholders which, if not softened, may result in a protracted legal case, the outcome of which, at this stage, is difficult to gauge," Deutsche Bank said in a note.
India desperately wants to add more power capacity to plug electricity shortages that sap the competitiveness of its businesses and hobble Asia's third-largest economy, where growth has slowed to its worst pace in ten years.
But authorities have struggled to balance a need for the private players in the infrastructure sector to make a profit, while protecting the ordinary consumer in a country with hundreds of millions of poor people.
"If we favour a tariff hike, we will be criticised for favouring Adani Group. In case we don't, the power sector troubles will mount, and hit potential investments," an official in the Gujarat government said, speaking on condition of anonymity. "We will have to tread very carefully," he said.
A prominent anti-corruption activist is currently on a hunger strike in New Delhi in protest against rising power tariffs.
Moves to raise electricity prices are perceived as hurting the country's poor and the issue could prove a sensitive one for Indian politicians, especially as national elections are due within a year. (Editing by Tony Munroe and Sonya Hepinstall)