MS- India Utilities- CERC’s Draft Regulations Made More Stringent

Quick Comment – Impact on our views: CERC

released the draft regulations that apply to inter-state

generation and transmission utilities for the period April

2014 to March 2019. While CERC has maintained ROE

at 16% (comprised of 15.5% plus an additional 0.5% for

scheduled commissioning), in line with the existing

regulations, it has made the normative operating

parameters more stringent. Hence, these draft

regulations in the current form seem neutral to negative

for NTPC and Power Grid. However, as in the past, the

final regulations (to be released before April 2014) could

relax some of these norms. A public hearing on these

regulations will be held on January 15-16, 2014.

Key changes for NTPC: We believe our earnings and

fair value would remain largely unchanged due to the

following key changes in the draft:

1. The incentive earned due to grossing up of tax is

likely to go away. This may take away about 1% of

additional ROE.

2. Heat rate incentive could fall, as the range from

actuals has been lowered (6.5% to 4.5%), and 25%

of the benefit needs to be shared with beneficiary

states.

3. Availability-linked incentive can now vary a bit more

than earlier on either side. A PLF-linked incentive

(Rs0.5/unit for PLF in excess of 85%) has been

introduced but it may not yield much given lower

PLFs due to SEB and domestic coal issues.

4. The key positive is recovery of water charges on

actuals, which was had been underabsorbed (about

Rs4bn in F2013).

Key changes for Power Grid: The draft regulations

have increased uptime availability norms and reduced

normative O&M expenses. We believe if implemented,

they could negatively affect earnings and fair value by

about 2%.

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Key excerpts from the draft regulations are as follows:

 Return on equity shall be computed at the base rate of

15.50% for thermal generating stations, transmission

system including communication system and run of the

river hydro generating station, and at the base rate of

16.50% for pumped storage hydro generating stations and

run of river generating station with pondage. An additional

return of 0.50% shall be allowed if projects are completed

within the scheduled timeline.

 Any financial gains by a generating company on account

of controllable parameters shall be shared between

generating company and the beneficiaries in the ratio of

3:1. Controllable parameters include: i) Station Heat Rate;

ii) Secondary Fuel Oil Consumption; and iii) Auxiliary

Energy Consumption

 Norms for O&M expenses for thermal and hydro

generating stations are now excluding water charges.

Water charges as applicable shall be allowed separately.

 Incentive to a generating station shall be payable at a flat

rate of 50 paise/unit for generation in excess of normative

PLF of 85%.

 Normative availability factor for AC transmission system is

99% (98% earlier), for HVDC bi-pole links is 98% (92%

earlier) and for HVDC back-to-back stations is 98% (95%

earlier).