At a time when elections are being fought and won or lost with the rise in electricity tariffs as a major debating point, the Central Electricity Regulatory Commission’s (CERC’s) new draft tariff rules try to ensure end-consumer benefits.
The tight operating norms for a five-year period starting from fiscal year 2015 will, however, hit the returns of regulated entities in generation and transmission. NTPC Ltd will suffer the most, with some brokerages forecasting as much as a six percentage points’ erosion in its return on equity (RoE) from the current 23%. That has clearly spooked investors, with the stock tumbling 11.26% on Tuesday.
While regulated entities such as NTPC are allowed a base RoE of 15.5%, the power producer’s returns are far in excess of that. That’s mainly owing to the incentives on tax, operational efficiency and plant availability, or readiness for production.
Under the existing norms, NTPC enjoys incentives just by ensuring a plant availability factor (PAF) of above 85%, even if its customers—typically state electricity boards—don’t buy power. According to Edelweiss Securities Ltd calculations, this could work out to be 56 paise per unit for a 1 percentage point increase in the PAF. The new rules, firstly, decree that the plant load factor (PLF), or capacity utilization, be used as the yardstick for granting incentives. Plant load factors are in any case declining owing to lower demand for power; for NTPC, capacity utilization fell to 83% in fiscal 2013 compared with 90%-plus levels five years ago. In the first two quarters of this fiscal year, PLFs fell further to less than 80%. Moreover, the new rules say that the power producer will be paid a flat rate of 50 paise as incentive for production in excess of 85% PLF.
Secondly, NTPC will also suffer from the withdrawal of tax benefits. Currently, the generator can recover higher income tax from its customers than what it has actually paid. For example, under section 80IA of income tax rules, where it paid zero income tax for 10 consecutive on new projects, NTPC was effectively able to earn a 23% RoE. CERC has said that these tax breaks should now be passed on to consumers.
Thirdly, the CERC has also lowered the heat rate standard for coal-based plants to 2,375kCal/kWh from 2,400kCal/kWh. When a power plant is more efficient its heat rate is lowered; but it is still able to charge its consumers based on the CERC standard. This yardstick has not only been lowered, power generators have also been asked to pass on a quarter of benefits gained from fuel efficiency to consumers.
CERC has a history of filing tough draft rules and then diluting them after public debate. Unless that happens this time around as well, the stock could lose further ground.
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