CERC hands a carrot to pvt generators & a stick to NTPC

Operating regulations for power generator tightened under new rules, FY15 earnings may be dented 11-13%

Two different rulings from the Central Electricity Regulatory Commission (CERC) over the weekend has left investors scratching their heads. While the regulatory has upheld a compensatory rate increase of Rs 0.524 a unit for Tata Power, it tightened norms for state-owned power producers like NTPC. In its final rate regulations for FY15-19, the power regulator has effectively capped NTPC’s regulated returns by tightening operating norms.

This has come as a nasty surprise for the investors. Nomura says the final tariff regulations overall offer meagre relief to NTPC’s earnings outlook. Tighter operating norms mean 11-13 per cent lower earnings for NTPC. Analysts are factoring in zero utilisation linked incentives for NTPC in the coming years.

What has come as a surprise to many analysts is the liberal attitude shown  to private producers but stringent rules for state-owned NTPC. Says one analyst, while states are asking for tariff cuts for power supplied by PSUs (rates being on the lower side), CERC is being very liberal in procuring power from private producers at much higher rates. The recent order by the regulator to increase rates for Adani, Tata Power and Lanco’s Udupi Power suggests contradiction.

In its final tariff regulations for FY15-19, the regulator has shifted the incentives goalpost for state-owned power producers to plant load factor (PLF) from the earlier plant availability factor (PAF). NTPC's returns will now depend on power offtake. If power procurers (read states) do not purchase power from NTPC and it does not run its plants at 85 per cent capacity, it will not be entitled to incentives. Currently, the regulated returns have been linked to availability of NTPC's plants. This will impact NTPC's return on equity by 150 basis points, claim analysts. Emkay Global says the regulations were contrary to expectation and the return on equity impact is negative against an expected growth of 2-2.5 per cent.  

Other than this, there are several other operating measures have also been tightened for NTPC. For instance, for new projects, land acquisition has been termed a ‘controllable’ factor. Also, working capital norms have been tightened significantly. In order to calculate interest on working capital, coal inventory level has been reduced to 15 days  for pithead plants and 30 days for non-pithead ones. What this implies is NTPC will now have lower interest pass-through on working capital. Misal Singh of Religare Institutional Research says the current provision of grossing up pre-tax return on equity (RoE) to after tax RoE with income tax to be recovered on an actual basis could negatively impact NTPC’s core RoE by 125 basis points.