CERC tariff norms differentiate between state-owned and private power generators

NTPC returns might get hit if incentives linked to plant load factor; generator would suffer if SEBs don't draw power

The Central Electricity Regulatory Commission (CERC) on Tuesday stunned the markets with its draft norms on tariffs for the power sector, which will be applicable from FY15 till FY19. These norms seek to tighten operating norms for power producing and transmission companies across the board, to have a bearing on the efficiency and returns of these companies. With the regulator proposing to tighten operating norms, the going could become tough for state-owned generators and transmission firms. Emkay Global believes if these draft norms are accepted then the impact will be negative for NTPC, mainly because these regulations propose shifting of incentives to the company's plant load factor (PLF) from plant available factor (PAF). Also, return on equity has been retained at the current  15.5 per cent, against the Street’s estimates of an increase. Also, no tax grossing up of return on equity is a negative.

While the market was expecting the tax grossing up to go, the shift from PAF to PLF is a negative surprise because it means that the regulator is discriminating between the private generators and the state-owned ones. While the private generators have been given the permission to raise tariffs, linking of PLF would cap NTPC’s returns. It would suffer if the badly-managed state electricity boards (SEBs) do not draw power due to their financial constraints. What this indicates is lack of proper thinking, says one analyst with a foreign brokerage. Rahul Modi of Antique Stock Broking says, “The availability-based incentives have been removed and PLF-based incentives have been reintroduced with a normative threshold of 85 per cent, which will lead to reduction of operational return on equity by two per cent.” However, he adds that annual fixed cost (AFC) recovery will be limited to the actual AFC on the upside, but if the actual PAF is lower than the normative PAF of 85 per cent, the company will not be incentivised in the same formula.

So far, state-owned NTPC has seen its incentives-linked to the available capacity to generate power. So, if NTPC’s plants were available for generation, irrespective of fuel availability or demand, they could avail of the benefits. Under the new norms, the regulator is proposing to link its incentives to actual power generated and the PLF (the capacity at which the power plant is operating). PLFs of most power generators have fallen below 70 per cent in recent times due to issues of fuel availability. Evidently, this is negative for the country’s largest power generator.  Initial analysis suggests the impact on PowerGrid Corporation, NHPC and SJVN is likely to be limited. These regulations would impact FY15 EPS by 12-14 per cent for NTPC, six to eight per cent for PGCIL, three to four per cent for SJVN, and one to two per cent for NHPC. The Street believes that it is best to wait and watch because a similar thing had happened in 2009, when CERC announced tariff guidelines for the previous five years. The final regulations are expected by the fourth week of January or the first week of February. However, for the stocks to perform, the guidelines need to be modified significantly and minor tinkering might not help.