CERC notifies power tariff regulations for 5 yrs

Changes are on the anvil in the way incentives and tax liabilities get calculated for central power generation and transmission firms as electricity regulator CERC has notified new tariff regulations.
The new norms will be in force for five years - from April 1, 2014 to March 31, 2019. They are not applicable to generating stations or inter-state transmission systems where tariffs has been discovered through competitive bidding.
As per the new norms, notified by the Central Electricity Regulatory Commission (CERC) on February 21, there are key changes with regard to tax and calculation of incentives for thermal power plants.

The changes would be negative for country's largest power producer NTPC and state-run transmission utility Power Grid, among others. NTPC stock fell 11.43 per cent to close at 117.05 on the BSE, while Power Grid was down 0.40 per cent at Rs 94.75.
"NTPC would be worst hit due to across-the-board cut in its incentives... Grossing up of tax on actual tax paid v/s applicable tax rate to hit NTPC," global brokerage firm Bank of America Merrill Lynch said in a report today.
The base rate of Return on Equity (RoE) should be "grossed up with the effective tax rate of the respective financial year", according to CERC.

For this purpose, the effective tax rate should be considered on the basis of actual tax paid in the respect of the financial year by the concerned generating company or the transmission licensee.

"The actual tax income on other income stream (ie income of non generation or non transmission business, as the case may be) shall not be considered for the calculation of effective tax rate," the regulator noted.
The base rate of RoE would be 15.5 per cent for thermal generating stations, transmission system including communication system and run of the river hydro generating station.
"We believe that now is the time for regulator to wear its 'consumer protection' hat and rationalise power RoEs without cutting core RoEs, which is what it did," Bank of America Merrill Lynch said.

Besides, the regulations require thermal plants to calculate incentives based on Plant Load Factor (PLF) rather than Plant Availability Factor (PAF). However, the incentive for every unit of electricity generated has been kept flat at 50 paise/kWh.
PLF is a measure of average capacity utilisation while PAF refers to average of daily declared capacities.
Incentives based on PLF would depend on actual power generation, a scenario that could result in lower income.