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TNSEB: Tariff hike, past arrears approval key to financial restructuring
FAC allowed as pass through on quarterly basis, ST power purchase to come down sizably
Tamil Nadu Electricity Regulatory Commission (TNERC) has allowed 37% tariff hike for Tamil Nadu Generation and Distribution
Company (TANGEDCO), which would address recurring under recovery. Also, the approval of Fuel adjustment charge (FAC)
would mean that any deviation in power purchase cost/fuel cost is recovered on quarterly basis. Three key aspects of Tariff
Order are: 1) FY13 would see addition of ~2GW of LT power, 2) Power purchase cost on aggregate basis to come down from
INR4/unit in FY12 to INR3.2/unit in FY13, a reduction of 22% and 3) ST power purchase of 2BUs is allowed only as a flexibility
for DISCOM to manage demand and at INR4/unit only.
DISCOMs need prior approval before increasing quantum or price on ST power procurement. Additionally, State government
has given in-principal approval to arrears of FY11/12, further improving credibility for the DISCOMs.
TN tariff hike, in-principal approval by state
government for past arrears – key milestone in the
sector: TNERC has allowed tariff hike of INR78.8b
(increase of 37%), in response to a tariff petition filed
by TANGEDCO in November 2011. Last tariff revision
was in August 2010 (after a gap of 7 years). Tariff hike
(estimate was INR80b) and timeline (before March
2012) are both in-line with earlier understanding.
Current tariff is effective from April 2012. Most
importantly, state government has granted in-principal
approval to absorb past arrears of FY11/FY12 estimated
at INR196b (petition was filed for INR248b). This, in our
view, is the most important event in the sector, more
so given the apprehensions on political will.
LT availability of power to improve in FY13, driving
overall cost down; ST power requirement estimated to
be low: In FY13, TANGEDCO will have 1,875MW of long
term power available from various projects getting
commissioned. Earlier, TN was procuring ~1.5-2.0GW of
power on spot basis, to meet the demand. The
availability of LT power will lower the requirement of
ST power. TNERC has allowed ~2BUs of ST power
purchases in FY13 (vs an average of ~10BU in last 2 years)
to provide flexibility to TANGEDCO in managing
demand, while cost is approved at INR4/unit. TO
stipulates prior approval of commission for any
deviation in quantity / price for ST power. This would
thus lower the overall power purchase cost for
TANGEDCO to INR3.2/unit in FY13E, from INR4/unit in
FY12, a reduction of 22%.
FY12 to be tipping point for SEB losses, UP remains last
in the league: During past 18 months, 24 states have
revised tariff. In Odhisa, the HC has refused to interfere
with the decisions relating to electricity tariff hike in
response to a PIL seeking review of ~40% tariff hike
affected for FY12. This is yet another landmark judgment
post the ruling by Delhi HC in case of tariff hike for Delhi,
opposed/stayed by state government. The recent round
of tariff bidding means that all top loss making states
have increased tariff except for Uttar Pradesh, where it
was pending given State elections. The revision of tariff
for UPDICOMs would thus remains the next key trigger
to watch out for. Thus, the ball is set rolling by DISCOMs
in favour of disciplined efforts to manage cost, file tariff
petition and hike tariffs. We continue to believe that
FY12 was the tipping point in terms of the deterioration
in SEB finances.
PFC/REC and PTC India specific beneficiary of improved
scenario for DISCOMs, apart from sector incumbents at
large: PFC and REC have seen sizable de-rating given the
issues on health of DISCOMs, given exposure to large
loss making states like Rajasthan (hiked tariff by 23% in
Sept-11), TN (37% now), UP (pending), etc. Similarly, PTC
India had corrected sizably due to issues of higher
debtor, ST borrowing to fund debtors increase and
higher exposure to state like TN and UP (INR10b of
debtors out of INR23b). Management of PTC India have
taken several steps to mitigate the impact, including
discontinuation of trade with the states, no counter
guarantee, etc. and thus problem is unlikely to mount
further. Current tariff hike /assurance of past arrears by
State government improved visibility on the recovery
of the dues.
TANGEDCO tariff hike approved, important event for the sector
In Nov-11, TANGEDCO had filed a tariff petition with TNERC, while last tariff revision
was in August 2010 (after a gap of 7 years). The current tariff petition was very
important as it would set a practice for regular tariff petition every year.
TNERC has approved tariff hike of INR78.8b, in-line with estimated INR80b and in
time bound manner (before Mar-12), as per our earlier understanding based on
discussion with authorities. Tariff hike is effective from April-12 and applicable
for the FY12-13E.
In our earlier discussion with TANGEDCO and TNERC in July 2011, we were informed
that the tariff petition would be filed by end of October/November, given
prevailing State election, Panchayats election, and tariffs will be approved by
February/March 2012. Given the increase of bus fares, milk prices, by State
government which again impacted the masses, there was increased comfort on
approval of 37% tariff hike proposed by TANGEDCO. The current approval is thus
most important event for the sector, given TN was highest loss making state in
FY09 and 2nd highest in FY10.
Proposed tariff hike to arrest on-going under recovery, past arrears to be
absorbed by government…
Based on the TO approved by the commission, the total under recovery for
TANGEDCO for FY13 is estimated at INR78.8b and is fully allowed through a tariff
hike (37%). This would ensure that there is no addition to under recoveries on an
on-going basis.
In its tariff petition, TANGEDCO had requested for creation of regulated assets to
the tune of INR247.6b, pertaining to FY11-13E based on its assessment of cost and
tariff hike proposed. However, commission has taken a very important step to
solicit advise of State government on treatment of such regulated asset. TNERC
made a plea to state government if the losses can be absorbed by State
government, so that consumers are not burdened with such losses. In continuation
of its drive to put State corporations in financial shape (earlier bus and milk prices
were hiked), TN government has given in-principal approval to absorb the past
arrears.
Arrears for TANGEDCO of INR196b (as approved by Commission) would be
amortized over the period of 5 years, starting from the year 2013-14 onwards.
However, the exact details and mechanism will be worked out in conjunction
with tariff revision and TANGEDCO’s improvement due to internal savings.
TNERC letter to State government on Regulated Assets
The Regulatory Asset which is being discussed in this letter is relating to the post
unbundling period. The amount involved being Rs.25,000/- crores and if the same is
amortized by way of tariff hike the impact on the consumer would be huge resulting
in a tariff shock to almost all the consumers for the next five years. Such a tariff hike
would take the tariff to abnormal levels and may become unbearable and may also
impact competitive nature of the industry. Under these circumstances, the
Commission desires to know if the Government is willing to meet the amortization
requirement of the Regulatory Asset. The views of the Government would enable
the Commission to address the issue of Regulatory Asset appropriately.
It is, therefore, requested that the Government may communicate their views as to
whether the entire Regulatory Asset or part of it could be absorbed by the Government
there by not passing on the entire burden on the electricity consumers of Tamil Nadu.
TN government response to the TNERC letter
It is to be informed that the Government has in-principle agreed with the request for
amortization and exact details and mechanism will be worked out in conjunction
with tariff revision and TANGEDCO’s improvement due to internal savings
Commission has also observed that there was no proper classification between
capital and revenue expenditure and equity infusion and debt drawl in these
categories are not properly maintained. In its assessment, commission has thus
highlighted that while debt was certainly used for meeting revenue gap, even
equity infusion was largely used towards revenue gap. Capex was almost nearly
funded through debt. Given this, the RoE is not allowed in its calculation of fixed
charge.
Infact, TNERC had also contemplated not allowing the interest cost on debt taken
for meeting revenue expenditure (as debt recovery for capex incurred is only
allowed as per regulation / for meeting working capital). However, it has allowed
the entire interest cost on the ground that such disallowance would add to the
existing problems of DISCOMs, not address/help incremental funding requirement,
and at the end burden the consumer at large. Commission has however stated
that provisional allowance of such interest would be dealt with properly once the
report of B K Chaturvedi committee is out and the treatment of past liabilities in
accordance with the same is worked out.
LT power availability to increase, cost of power procurement expected to
come down by 22% in FY13
TO highlights sizable improvement in the operating performance of TANGEDCO
as ~2GW of capacity (listed below) is added to its long term power purchase
portfolio. This is expected to lower the overall cost of power purchase for
TANGEDCO.
Also, commission has highlighted that while ST power requirement is nearly NIL,
it has allowed 2BUs of ST power procurement to provide flexibility to DISCOM to
managed demand. ST power rate is considered at only INR4/unit and any deviation
in quantity and price would be only with prior consent of commission.
Owing to this, the power purchase cost for TANGEDCO is expected to come down
from INR4/unit in FY12 (up from INR3.8/unit in FY11) to INR3.2/unit, a reduction of
22%.
Tariff proposal in-line with our past understanding/interaction, Bihar too
has announced a tariff hike
Our view of turnaround of TANGEDCO was based on 1) Tariff hike to ensure no
under recovery on on-going basis, and 2) Financial support by State government
through bonds/equity infusion/underwriting past arrears. The current tariff
framework is thus in-line with our earlier understanding, based on our discussion
with TNERC/TANGEDCO.
Bihar has also announced a tariff hike ~12% and thus, the ball is set rolling by
DISCOMs in favour of disciplined efforts to manage cost, file tariff petition and
tariff hikes. The tariff hike of UP (post recent elections) would be the next key
trigger to watch out for.
Buy PFC, REC and PTC India
Earlier, Rajasthan hiked tariff by 23% (Sept-11), and TN has now got a tariff hike
(Mar-12), which together accounted for 35%+ of total commercial losses. Totally
24 States have revised tariffs in past 18 months.
We continue to believe that FY12 was the tipping point in terms of the deterioration
in SEB finances, and things have started improving. The improvement is being
driven by i) higher tariffs coupled with ii) lower power procurement costs. Power
purchase costs will decline due to lower merchant tariffs and large capacity
additions in state / central sector.
Concern on PFC/REC for their sizable exposure to Rajasthan (8.8% of loans for PFC
and 11% for REC) was addressed partly with tariff hike and partly owing to
government’s underwriting towards past arrears, while concern over exposure to
TN will also get addressed with current tariff hike/assurance towards past arrears.
This coupled with improved cashflow position for major DISCOMs are expected to
be key trigger re-rating, in our view.
Similarly, PTC India has seen sizable correction due to issues of higher debtor, ST
borrowing to fund debtors increase and higher exposure to state like TN and UP
(INR10b of debtors out of INR23b). Management of PTC India have taken several
steps to mitigate the impact, including discontinuation of trade with the states,
no counter guarantee, etc. and thus problem is unlikely to mount further. Current
tariff hike /assurance of past arrears by State government improves visibility on
the recovery of the dues.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
TNSEB: Tariff hike, past arrears approval key to financial restructuring
FAC allowed as pass through on quarterly basis, ST power purchase to come down sizably
Tamil Nadu Electricity Regulatory Commission (TNERC) has allowed 37% tariff hike for Tamil Nadu Generation and Distribution
Company (TANGEDCO), which would address recurring under recovery. Also, the approval of Fuel adjustment charge (FAC)
would mean that any deviation in power purchase cost/fuel cost is recovered on quarterly basis. Three key aspects of Tariff
Order are: 1) FY13 would see addition of ~2GW of LT power, 2) Power purchase cost on aggregate basis to come down from
INR4/unit in FY12 to INR3.2/unit in FY13, a reduction of 22% and 3) ST power purchase of 2BUs is allowed only as a flexibility
for DISCOM to manage demand and at INR4/unit only.
DISCOMs need prior approval before increasing quantum or price on ST power procurement. Additionally, State government
has given in-principal approval to arrears of FY11/12, further improving credibility for the DISCOMs.
TN tariff hike, in-principal approval by state
government for past arrears – key milestone in the
sector: TNERC has allowed tariff hike of INR78.8b
(increase of 37%), in response to a tariff petition filed
by TANGEDCO in November 2011. Last tariff revision
was in August 2010 (after a gap of 7 years). Tariff hike
(estimate was INR80b) and timeline (before March
2012) are both in-line with earlier understanding.
Current tariff is effective from April 2012. Most
importantly, state government has granted in-principal
approval to absorb past arrears of FY11/FY12 estimated
at INR196b (petition was filed for INR248b). This, in our
view, is the most important event in the sector, more
so given the apprehensions on political will.
LT availability of power to improve in FY13, driving
overall cost down; ST power requirement estimated to
be low: In FY13, TANGEDCO will have 1,875MW of long
term power available from various projects getting
commissioned. Earlier, TN was procuring ~1.5-2.0GW of
power on spot basis, to meet the demand. The
availability of LT power will lower the requirement of
ST power. TNERC has allowed ~2BUs of ST power
purchases in FY13 (vs an average of ~10BU in last 2 years)
to provide flexibility to TANGEDCO in managing
demand, while cost is approved at INR4/unit. TO
stipulates prior approval of commission for any
deviation in quantity / price for ST power. This would
thus lower the overall power purchase cost for
TANGEDCO to INR3.2/unit in FY13E, from INR4/unit in
FY12, a reduction of 22%.
FY12 to be tipping point for SEB losses, UP remains last
in the league: During past 18 months, 24 states have
revised tariff. In Odhisa, the HC has refused to interfere
with the decisions relating to electricity tariff hike in
response to a PIL seeking review of ~40% tariff hike
affected for FY12. This is yet another landmark judgment
post the ruling by Delhi HC in case of tariff hike for Delhi,
opposed/stayed by state government. The recent round
of tariff bidding means that all top loss making states
have increased tariff except for Uttar Pradesh, where it
was pending given State elections. The revision of tariff
for UPDICOMs would thus remains the next key trigger
to watch out for. Thus, the ball is set rolling by DISCOMs
in favour of disciplined efforts to manage cost, file tariff
petition and hike tariffs. We continue to believe that
FY12 was the tipping point in terms of the deterioration
in SEB finances.
PFC/REC and PTC India specific beneficiary of improved
scenario for DISCOMs, apart from sector incumbents at
large: PFC and REC have seen sizable de-rating given the
issues on health of DISCOMs, given exposure to large
loss making states like Rajasthan (hiked tariff by 23% in
Sept-11), TN (37% now), UP (pending), etc. Similarly, PTC
India had corrected sizably due to issues of higher
debtor, ST borrowing to fund debtors increase and
higher exposure to state like TN and UP (INR10b of
debtors out of INR23b). Management of PTC India have
taken several steps to mitigate the impact, including
discontinuation of trade with the states, no counter
guarantee, etc. and thus problem is unlikely to mount
further. Current tariff hike /assurance of past arrears by
State government improved visibility on the recovery
of the dues.
TANGEDCO tariff hike approved, important event for the sector
In Nov-11, TANGEDCO had filed a tariff petition with TNERC, while last tariff revision
was in August 2010 (after a gap of 7 years). The current tariff petition was very
important as it would set a practice for regular tariff petition every year.
TNERC has approved tariff hike of INR78.8b, in-line with estimated INR80b and in
time bound manner (before Mar-12), as per our earlier understanding based on
discussion with authorities. Tariff hike is effective from April-12 and applicable
for the FY12-13E.
In our earlier discussion with TANGEDCO and TNERC in July 2011, we were informed
that the tariff petition would be filed by end of October/November, given
prevailing State election, Panchayats election, and tariffs will be approved by
February/March 2012. Given the increase of bus fares, milk prices, by State
government which again impacted the masses, there was increased comfort on
approval of 37% tariff hike proposed by TANGEDCO. The current approval is thus
most important event for the sector, given TN was highest loss making state in
FY09 and 2nd highest in FY10.
Proposed tariff hike to arrest on-going under recovery, past arrears to be
absorbed by government…
Based on the TO approved by the commission, the total under recovery for
TANGEDCO for FY13 is estimated at INR78.8b and is fully allowed through a tariff
hike (37%). This would ensure that there is no addition to under recoveries on an
on-going basis.
In its tariff petition, TANGEDCO had requested for creation of regulated assets to
the tune of INR247.6b, pertaining to FY11-13E based on its assessment of cost and
tariff hike proposed. However, commission has taken a very important step to
solicit advise of State government on treatment of such regulated asset. TNERC
made a plea to state government if the losses can be absorbed by State
government, so that consumers are not burdened with such losses. In continuation
of its drive to put State corporations in financial shape (earlier bus and milk prices
were hiked), TN government has given in-principal approval to absorb the past
arrears.
Arrears for TANGEDCO of INR196b (as approved by Commission) would be
amortized over the period of 5 years, starting from the year 2013-14 onwards.
However, the exact details and mechanism will be worked out in conjunction
with tariff revision and TANGEDCO’s improvement due to internal savings.
TNERC letter to State government on Regulated Assets
The Regulatory Asset which is being discussed in this letter is relating to the post
unbundling period. The amount involved being Rs.25,000/- crores and if the same is
amortized by way of tariff hike the impact on the consumer would be huge resulting
in a tariff shock to almost all the consumers for the next five years. Such a tariff hike
would take the tariff to abnormal levels and may become unbearable and may also
impact competitive nature of the industry. Under these circumstances, the
Commission desires to know if the Government is willing to meet the amortization
requirement of the Regulatory Asset. The views of the Government would enable
the Commission to address the issue of Regulatory Asset appropriately.
It is, therefore, requested that the Government may communicate their views as to
whether the entire Regulatory Asset or part of it could be absorbed by the Government
there by not passing on the entire burden on the electricity consumers of Tamil Nadu.
TN government response to the TNERC letter
It is to be informed that the Government has in-principle agreed with the request for
amortization and exact details and mechanism will be worked out in conjunction
with tariff revision and TANGEDCO’s improvement due to internal savings
Commission has also observed that there was no proper classification between
capital and revenue expenditure and equity infusion and debt drawl in these
categories are not properly maintained. In its assessment, commission has thus
highlighted that while debt was certainly used for meeting revenue gap, even
equity infusion was largely used towards revenue gap. Capex was almost nearly
funded through debt. Given this, the RoE is not allowed in its calculation of fixed
charge.
Infact, TNERC had also contemplated not allowing the interest cost on debt taken
for meeting revenue expenditure (as debt recovery for capex incurred is only
allowed as per regulation / for meeting working capital). However, it has allowed
the entire interest cost on the ground that such disallowance would add to the
existing problems of DISCOMs, not address/help incremental funding requirement,
and at the end burden the consumer at large. Commission has however stated
that provisional allowance of such interest would be dealt with properly once the
report of B K Chaturvedi committee is out and the treatment of past liabilities in
accordance with the same is worked out.
LT power availability to increase, cost of power procurement expected to
come down by 22% in FY13
TO highlights sizable improvement in the operating performance of TANGEDCO
as ~2GW of capacity (listed below) is added to its long term power purchase
portfolio. This is expected to lower the overall cost of power purchase for
TANGEDCO.
Also, commission has highlighted that while ST power requirement is nearly NIL,
it has allowed 2BUs of ST power procurement to provide flexibility to DISCOM to
managed demand. ST power rate is considered at only INR4/unit and any deviation
in quantity and price would be only with prior consent of commission.
Owing to this, the power purchase cost for TANGEDCO is expected to come down
from INR4/unit in FY12 (up from INR3.8/unit in FY11) to INR3.2/unit, a reduction of
22%.
Tariff proposal in-line with our past understanding/interaction, Bihar too
has announced a tariff hike
Our view of turnaround of TANGEDCO was based on 1) Tariff hike to ensure no
under recovery on on-going basis, and 2) Financial support by State government
through bonds/equity infusion/underwriting past arrears. The current tariff
framework is thus in-line with our earlier understanding, based on our discussion
with TNERC/TANGEDCO.
Bihar has also announced a tariff hike ~12% and thus, the ball is set rolling by
DISCOMs in favour of disciplined efforts to manage cost, file tariff petition and
tariff hikes. The tariff hike of UP (post recent elections) would be the next key
trigger to watch out for.
Buy PFC, REC and PTC India
Earlier, Rajasthan hiked tariff by 23% (Sept-11), and TN has now got a tariff hike
(Mar-12), which together accounted for 35%+ of total commercial losses. Totally
24 States have revised tariffs in past 18 months.
We continue to believe that FY12 was the tipping point in terms of the deterioration
in SEB finances, and things have started improving. The improvement is being
driven by i) higher tariffs coupled with ii) lower power procurement costs. Power
purchase costs will decline due to lower merchant tariffs and large capacity
additions in state / central sector.
Concern on PFC/REC for their sizable exposure to Rajasthan (8.8% of loans for PFC
and 11% for REC) was addressed partly with tariff hike and partly owing to
government’s underwriting towards past arrears, while concern over exposure to
TN will also get addressed with current tariff hike/assurance towards past arrears.
This coupled with improved cashflow position for major DISCOMs are expected to
be key trigger re-rating, in our view.
Similarly, PTC India has seen sizable correction due to issues of higher debtor, ST
borrowing to fund debtors increase and higher exposure to state like TN and UP
(INR10b of debtors out of INR23b). Management of PTC India have taken several
steps to mitigate the impact, including discontinuation of trade with the states,
no counter guarantee, etc. and thus problem is unlikely to mount further. Current
tariff hike /assurance of past arrears by State government improves visibility on
the recovery of the dues.
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