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Our interactions with Reliance Infrastructure’s (RELI) Mumbai distribution
heads indicate that as per Solicitor General of India (SGI) the new
licensee has to develop an independent network for electricity
distribution. This, in addition to MERC’s recent public notice inviting
comments/suggestions to renew RELI’s Mumbai licence, is likely to
eliminate the overhang on the stock with respect to Mumbai regulated
business.
SGI opinion: Any new licensee will have to lay own distribution
network
Distribution assets will continue to remain with RELI regardless of the status of
license. If the license is not renewed, then RELI will be unable to distribute power
within Mumbai from August 16, 2011 (expiring on August 15, 2011). No applicants
have been granted new licenses either. Moreover, as per SGI, any new licensee can
only distribute power using its own distribution network or through open access
(currently available for only >1 MW). Even if open access is allowed for less than 1
MW (by changing the law), the new licensees will have to use RELI’s network by
paying a wheeling charge. A new network, change of law and negotiation of
wheeling charges are all time consuming processes. Given these constraints and
the little time left till August 15, 2011, it appears imperative that RELI’s license
would be renewed by MERC.
MERC issues public notice for renewal of RELI’s Mumbai license
It appears that MERC, being cognizant of the above, is also of the view that RELI’s
license be renewed. MERC has recently issued a public notice in newspapers
inviting objections (if any) to renew RELI’s Mumbai power distribution license within
July 09, 2011.
Outlook: License renewal imperative
Even in the unlikely case of RELI’s license not being renewed, it will still retain
ownership of its assets which it can either surrender at the highest bid value (market
value) or offer to other licensees for open access. This would ensure that earnings from
Mumbai power business are sustained. We find these developments to be positive for
the stock and maintain ‘BUY/Sector Outperformer’ recommendation/rating on it.
Other updates
Synopsis of the views of SGI
The management shared with us various provisions of the Electricity Act 2003, the views
expressed by SGI (in June 2011) who was approached by Central Electricity Regulatory
Commission (CERC) on the issue on behalf of the Forum of Regulators. The inference is as
follows:
• New licensees shall have to lay their own distribution network for distributing
electricity. It is RELI’s license which is up for renewal with NO bearing on ownership of
its assets.
• RELI’s assets can be taken over (at market value) only in case of non performance of
customer service parameters OR if RELI willingly gives up its license or invites such
takeover.
• If RELI’s license is not renewed then the company will still own its assets and will have
the right to offer its network to new licensees at market value through a bidding
process supervised by MERC.
• Any new licensee can distribute power only by setting up his own network or via open
access.
• Open access is currently applicable to sale of power for >1 MW. For this to be
applicable at retail level (required for new licensees to sell power though RELI’s
network), the law needs to be altered for less than 1 MW.
• Exception: Tata Power, which is using open access on RELI's network to supply
electricity, is an exception to the above and cannot be used as a case law in general
for new licensees.
Power procurement by RELI: PPA details
In addition to its 500 MW generation at Dahanu, to meet Mumbai demand RELI has signed
medium-term PPAs for 449 MW up to FY14 with three parties, while it has invited long-term
tenders FY17 onwards for 1 GW. It is planning to tie up some more power through mediumterm
contracts for FY15 and FY16.
MERC to determine cross‐subsidy charges for cross‐over customers to
Tata Power
As per the RELI management, MERC is currently finalizing the cross-subsidy charges that
cross-over customers to Tata Power have to pay over and above the wheeling charges to
RELI. Cross subsidy allows RELI to charge higher tariffs to affluent customers so as to
subsidize its poorer customers. In absence of this charge, Tata Power has been able to
poach the richer paying customers of RELI since Tata Power’s tariff even with wheeling
charges is cheaper. Once MERC determines the cross subsidy charge and it is levied, there
will not be much differential left between RELI and Tata Power and, hence, the cross-over of
customers is expected to slow down.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Our interactions with Reliance Infrastructure’s (RELI) Mumbai distribution
heads indicate that as per Solicitor General of India (SGI) the new
licensee has to develop an independent network for electricity
distribution. This, in addition to MERC’s recent public notice inviting
comments/suggestions to renew RELI’s Mumbai licence, is likely to
eliminate the overhang on the stock with respect to Mumbai regulated
business.
SGI opinion: Any new licensee will have to lay own distribution
network
Distribution assets will continue to remain with RELI regardless of the status of
license. If the license is not renewed, then RELI will be unable to distribute power
within Mumbai from August 16, 2011 (expiring on August 15, 2011). No applicants
have been granted new licenses either. Moreover, as per SGI, any new licensee can
only distribute power using its own distribution network or through open access
(currently available for only >1 MW). Even if open access is allowed for less than 1
MW (by changing the law), the new licensees will have to use RELI’s network by
paying a wheeling charge. A new network, change of law and negotiation of
wheeling charges are all time consuming processes. Given these constraints and
the little time left till August 15, 2011, it appears imperative that RELI’s license
would be renewed by MERC.
MERC issues public notice for renewal of RELI’s Mumbai license
It appears that MERC, being cognizant of the above, is also of the view that RELI’s
license be renewed. MERC has recently issued a public notice in newspapers
inviting objections (if any) to renew RELI’s Mumbai power distribution license within
July 09, 2011.
Outlook: License renewal imperative
Even in the unlikely case of RELI’s license not being renewed, it will still retain
ownership of its assets which it can either surrender at the highest bid value (market
value) or offer to other licensees for open access. This would ensure that earnings from
Mumbai power business are sustained. We find these developments to be positive for
the stock and maintain ‘BUY/Sector Outperformer’ recommendation/rating on it.
Other updates
Synopsis of the views of SGI
The management shared with us various provisions of the Electricity Act 2003, the views
expressed by SGI (in June 2011) who was approached by Central Electricity Regulatory
Commission (CERC) on the issue on behalf of the Forum of Regulators. The inference is as
follows:
• New licensees shall have to lay their own distribution network for distributing
electricity. It is RELI’s license which is up for renewal with NO bearing on ownership of
its assets.
• RELI’s assets can be taken over (at market value) only in case of non performance of
customer service parameters OR if RELI willingly gives up its license or invites such
takeover.
• If RELI’s license is not renewed then the company will still own its assets and will have
the right to offer its network to new licensees at market value through a bidding
process supervised by MERC.
• Any new licensee can distribute power only by setting up his own network or via open
access.
• Open access is currently applicable to sale of power for >1 MW. For this to be
applicable at retail level (required for new licensees to sell power though RELI’s
network), the law needs to be altered for less than 1 MW.
• Exception: Tata Power, which is using open access on RELI's network to supply
electricity, is an exception to the above and cannot be used as a case law in general
for new licensees.
Power procurement by RELI: PPA details
In addition to its 500 MW generation at Dahanu, to meet Mumbai demand RELI has signed
medium-term PPAs for 449 MW up to FY14 with three parties, while it has invited long-term
tenders FY17 onwards for 1 GW. It is planning to tie up some more power through mediumterm
contracts for FY15 and FY16.
MERC to determine cross‐subsidy charges for cross‐over customers to
Tata Power
As per the RELI management, MERC is currently finalizing the cross-subsidy charges that
cross-over customers to Tata Power have to pay over and above the wheeling charges to
RELI. Cross subsidy allows RELI to charge higher tariffs to affluent customers so as to
subsidize its poorer customers. In absence of this charge, Tata Power has been able to
poach the richer paying customers of RELI since Tata Power’s tariff even with wheeling
charges is cheaper. Once MERC determines the cross subsidy charge and it is levied, there
will not be much differential left between RELI and Tata Power and, hence, the cross-over of
customers is expected to slow down.
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