The power regulator believes since all expenditure for generating and supplying power by regulated entities such as NTPC were taken of. Moreover, it is convinced that since NTPC got an additional reasonable rate of return on investment through the life of its generating stations in the 2014 tariff regulations, funding and financing of its projects, and its revenue and cash flows, were not likely to be hit.
CERCs view is understood to be that NTPCs profit margin compared to the previous tariff regulations may be reduced, adding that this could be made up by operating plants efficiently.
While retaining the base return on equity (RoE) at 15.5% and the additional RoE at 0.5% for timely completion of projects, the CERC had shifted the basis for incentives from the plant load factor (PLF) to the plant availability factor (PAF).
Further, the authority had said the tax on the income would henceforth be computed with reference to the actual income paid on a pro rata basis with respect to RoE.
NTPC said the impact on account of the grossed up RoE recovery and PLF-linked incentives in 2014-15 would be Rs 1,100 crore and Rs 1,800 crore, respectively. The power producer claimed the aggregate loss of internal resources during the tariff period would be Rs 14,500 crore, resulting in lower investments of Rs 48,350 crore and lower capacity addition to the tune of 9,660 MW.
Analysts have estimated that the new regulations could erode NTPCs RoE by around 4% and the companys earnings by about 6-7%. In FY14, the company reported revenues of Rs 71,603 crore and net profit of Rs 10,975 crore.
In a note written after the draft guidelines were issued in December last year, Crisil said the changed guidelines had the potential, if implemented, to reduce aggregate annual profits of Crisil-rated utilities by Rs1,400 crore, or nearly 7% of their profits in 2012-13. The analysis covered 13 Crisil-rated power utilities that come under the purview of CERC.
The ratings agency, however, added that the guidelines will not impact the credit risk profiles of these utilities since they retained the crucial features of availability-based fixed-cost recovery, which covers debt servicing for these utilities. This will help them maintain stability in cash flows, and, therefore, in credit quality, Crisil observed.
Analysts from Bank of America Merrill Lynch observed that, led by excess RoEs and the opening up of the sector, addition to capacity had been robust while deficits had halved. Consequently we believe that now is the time for the regulator to wear its consumer protection hat and rationalise power RoEs without cutting core RoEs, which is what it did, the analysts wrote.
In response to NTPCs grievance on the operational norms and parameters, the commission has clarified that these have been framed on the basis of the performance in five years 2008-09-2012-13 and did not suffer from any legal or technical infirmity.