CERC draft on new norms issued for power rates

Could dent utility earnings, ease rates for consumers, say analysts; incentives sought to be linked to plant load factor

The Central Electricity Regulatory Commission (CERC) has announced a set of proposals for new five-year rate guidelines. If implemented, experts say, these could dent the earnings of power utilities but reduce consumer rates.

Analysts projected a hit of up to eight per cent to annual revenue for government-owned NTPC, the largest generating company. News of the proposed regulations prompted a selloff of its stock, which fell a record 11.2 per cent on Tuesday.

The new guidelines are to come into effect in April next year. The draft seeks to tighten operating norms for generators, including parameters governing heat and oil consumed to produce power, and to link incentives to the plant load factor (PLF). Generators will be incentivised for higher generation, reflected in PLF. There is also a disincentive, to be levied if plants are available for less than 85 per cent of the time.

"The impact of these regulations is negative on the returns earned by generation utilities. From a stock-specific view, the impact of the proposed regulations is seven to eight per cent on earnings for NTPC, compared to a marginal two to three per cent for Power Grid," global investment bank Barclays said, putting the overall impact of the proposed regulations at Rs 833 crore or seven per cent of NTPC's annual post-tax profit.

The company sought to salvage the situation in a hurried press conference, arguing the market analysis had missed on positive changes and not much should be read into the draft. "There is always a significant difference between the draft and the final versions of these regulations. There is no need to panic," said NTPC Chairman and Managing Director Arup Roy Choudhury. Director-commercial I J Kapoor said there would be some impact on rates but did not elaborate.

The new regulations would not cover power projects bid out to companies which promise supply at lowest rates. It would, therefore, have only a partial impact on private generators such as Lanco Infratech and Tata Power. Also, the regulations would dent the earnings of transmission companies like Power Grid Corporation by a marginal two to three per cent.

Choudhury said the regulator's proposal to link incentives to PLF was a mistake. "Even CERC knows that PLF has no value in our business. We will represent our views to the Commission." Analysts, however, disagree. "CERC is clearly pushing for a shift towards the earlier regime, where incentives were linked to PLF. In the current system of PAF (Plant Availability Factor), discoms have to pay to generators even if the former back down on committed purchases, as the machine has been available. Now, however, discoms will pay for only what they have consumed," said Salil Garg, director-corporate ratings, India Ratings & Research, adding it was too early to estimate the exact impact.

Also, in the new regulations, the tax on the income will be calculated on the actual levy paid by the company. According to Barclays, this would have a post-tax impact of Rs 190 crore on profitability. However, CERC has allowed a rise in the annual escalation allowed on operation and maintenance expenses from 5.72 per cent earlier to 6.35 per cent now.