| It's loss making Discoms vs. profitable Gencos...and the referee (CERC) is in a tight spot |
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We reviewed the presentations made by regulated utilities and other interested parties to CERC during the public hearing conducted on 15-16th January, in relation to FY15-19 draft tariff regulations. The representations come across as a match of one-upmanship between loss making regulated Discoms and profitable regulated generation companies (Gencos). In a bid to restore their financial health and contain cost of supply to customers, Discoms lobbied for even more stringent regulations to slash RoE earned by Gencos, a risk for NTPC (OW). As the cost of transmission in overall cost of supply is significantly lower, PGCIL’s (OW) submissions did not attract much opposition.
· Representation by NTPC. All arguments aimed at rollback of adverse measures in draft and lift RoE profile. Also see related research ‘NTPC – The dust shall settle, January 15’. Key highlights of NTPC’s presentation to CERC:
(1) Incentive linked to availability may be retained, as PLF is beyond generator’s control. The service rendered is capability to supply power, which ought to be incentivized. High PLF (85%+ required to earn incentive as per draft) is not sustainable due to fuel shortage, deteriorating coal GCV, depressed electricity demand and back down on electricity procurement by Discoms.
(2) Existing operating norms for gross SHR & auxiliary consumption, which have been tightened in the draft should be retained. As per NTPC, norms should be based on country wide average and above-average performance should be incentivized. They argued that ageing of units and low PLF due to factors beyond NTPC’s control impact heat rate adversely and should be factored while setting norms.
(3) Pre-tax RoE may be retained, as additional cash flow is required to negotiate lower interest rate with banks and fund substantial development pipeline of projects.
(4) Target availability of project for recovery of fixed costs and RoE. NTPC represented that for plants with CoD after Apr-2009 normative PAF may be set at 70%, commensurate with FSA, for stations with CoD prior to Apr-2009 the level may be set at 80% vs. 85% as indicated in the draft (and prevalent in FY09-14 regulations too).
(5) Raise assured RoE on invested equity from 15.5% to 18%-20%, citing high cost of funds and to adequately provide for sector risks. They even argued for RoE during construction to provide for delay in construction due to uncontrollable factors beyond utility’s control.
(6) Regulator should strive for stability in tariff policy.
· Representation by select Discoms & Prayas (a NGO). BSES cited that PBDIT of central power utilities (NTPC, NHPC, PGCIL, SJVN, THDC) put together over FY10-13 was Rs1174bn, more than combined loss of Discoms for the same period (Rs1095bn) as per Shunglu Committee report. Discoms (we reviewed presentations of Orissa, UP, Kerala, and BSES) and Prayas naturally argued for that profitable Gencos should take a haircut in profitability-
(1) Audit pass through of energy cost billed by Gencos to Discoms- bills should be based on actual coal consumed, along with proof of GCV
(2) Gencos should not be incentivized based on declared capacity but based on actual generation. Incentivizing generators without considering commercial viability is not in interest of the consumer or downstream Discoms. The normative PAF and PLF level prescribed in the draft (85%) should be raised further. The rate for calculating PLF based incentive should be reduced from Rs0.5/kWh to Rs0.25/kWh.
(3) Gains on account of controllable parameters (SHR, AUX) for Gencos should be shared in the ratio of 1:1 rather than only 25% of gains as suggested in the draft. On the other hand losses on account of these parameters should not be passed on to Discoms (as suggested in the draft) but should be shared equally as well.
(4) Baseline RoE of Gencos should be reduced from 15.5%. Primary reason for low cost of debt for Gencos is that most of their business risks are completely passed on to Discoms. So appropriate RoE should be restricted to risk free rate + 2%. Prayas argued that net equity (depreciated) should be used for calculating RoE instead of historical equity invested over life of the project.
(5) Heat rate norms should be tightened further. Prayas argued that heat rate incentive should be allowed on net heat rate (post AUX) and norm should be set around median levels for operational units in India.
(6) Non-tariff income (e.g. financial income, or income from sale of ash, scrap etc.) of Gencos should be deducted while calculating Annual Revenue Requirement (ARR) for determination of tariff.
· Submission by PGCIL. PGCIL argued for relaxation in O&M charges for transmission sector, reduction in target availability, and higher RoE. Right of way and land acquisition should not be considered as controllable factors. In our view, good execution track record of PGCIL, genuine need of internal accruals to meet 12thPlan upsized targets should work in favor of India’s HV long distance transmission monopoly.
· CERC in a tight spot. CERC is in a tight spot between Gencos/Transcos on one end and Discoms/ public interest groups on the other. As populism finds favor ahead of general elections in India and subsidies being doled out to cut the electricity bill of the end consumer, the regulator may find it difficult to yield in to demands of profitable utilities (especially Gencos), in our view.
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