Column: Takeaways from CERC tariff norms

Updated: Dec 26 2013, 04:49am hrs
The Central Electricity Regulatory Commission (CERC) has come out with a new set of draft tariff regulations for 2014-19. The regulations, when approved, would be applicable to all central sector power generating and transmission companies, and generators and transmission licensees proposing to sell power to more than one state or those involved in inter-state transmission. We have seen a big thumbs down to the draft regulations by the investor community, manifested in dragging down of the share price of NTPC, the biggest power generator in the country, by almost 11.5% on the day the draft regulations were made public. Does this mean the new regulations are consumer friendly

While promoting investment in the power sector forms a part of CERCs mission, bringing about efficiency in the operations of the power generation and transmission companies and tariff rationalisation are equally important objectives of the commission. CERCs tariff regulations have to take a balanced view about the concerns of the power generators, transmission companies and investor community on one hand and that of the consumers of electricity on the other. What is important is that the final regulations are based on the principle of transparency, techno-economic rigour and fairness so that neither consumers nor generators gain unduly at the expense of the other. Looking at the proposed regulations from this perspective, has CERC done a good job in protecting the interests of both the stakeholders

Data from the Power Finance Corporations (PFC) report on the performance of the state power utilities for 2006-07 to 2011-12 shows that, at the aggregate national level, the cost of power purchase forms about 61-62% of the total expenditure of distribution companies (discoms) supplying power to ultimate consumers. Analysis of the data from PFC also shows that the power purchase costs of discoms have risen at a compounded annual rate of 16.42% between 2006-07 and 2011-12, when coal availability and hence higher coal cost was not much of a concern. Another set of data ranging over the past 10 years shows that the central sector power generating companies, the main entities coming under the purview of the proposed regulations, have been consistently meeting 41-42% of the power requirements of the discoms. In a sense, the proposed regulations will have over 24% impact on the tariffs that consumers would have to pay in a scenario where costs of power purchase as well as total discom expenditure has been rising at over 16% per annum compounded for the past 5-6 years. So, it is important that the regulations get it right from the consumers perspective.

From the consumers perspective, the most contentious provision in the proposed regulations, at least from the generator and investor community point of view, namely the rationalisation of the unjust tax arbitrage that the generating and transmission companies were perhaps unjustly enjoying, is a welcome step. Some analysts have estimated the withdrawal of tax arbitrage hit to companies like NTPC to be about R800 crore per year. With NTPC generating about 232 billion units in 2012-13, this will translate into consumers gaining a respite of about 3 paise per unit.

Another key change in the proposed regulations is linking generation incentives to plant load factor (PLF) or actual generation achieved rather than on plant availability, which is the case in existing regulations (2009-14). The proposed regulations prescribe that an incentive of R0.5/kWh would be available to generators if the normative PLF is achieved. This is another fine example of the balanced approach of the proposed draft regulations. Under existing regulations, since the incentive is based on availability rather than actual PLF, generators still earn the incentive even though they do not actually generate or dispatch power. This clause in the existing regulations is becoming contentious. In recent times, due to non-availability of linkage coal, generators, in order to fulfil their PPA requirements, have been procuring coal from alternate sources such as e-auction or imports. The coal from alternate sources being 2-3 times the linkage coal price, however, increases the generation cost that is sometimes unaffordable to the state utilities and they do not schedule the power from such generating assets. Under the present regulations, discoms have to pay the full incentive to the generator, although they may not actually be buying the power as the payment of incentive is linked to availability and not actual generation or PLF. By changing over from availability to PLF, discoms will not have to pay the incentive as long as they do not buy or schedule power to the extent of norms prescribed in the new proposed draft regulations, which safeguard the supply companies and its consumers from payment of incentive without buying or scheduling the generation beyond the prescribed norms. But this will result in generators losing part of earnings. The extent of earning loss that may be suffered by a leading generator like NTPC could be in the region R140 crore per year per 1% loss in PLF below the prescribed norm if buyers (discoms) do not want to dispatch or schedule NTPC plants due to part of generation being done with costly imported or e-auction coal. The proposed regulations, however, have a provision which states that the generators can keep on generating as long as the weighted average price of coal, when mixed with coal from alternate sources, is not more than 30% the price of coal without considering alternate sources. Thus, generators can hope to meet the prescribed norm for PLF without having to worry whether or not the discoms will schedule their generation as long as the weighted average price of coal they use for generation is not 30% above the price of linkage coal. This provision does not completely safeguard the interest of the generators but is also not as one-sided as the provisions in the existing regulation, which put the entire burden on the consumers.

Other changes in the proposed regulations are with respect to operating norms such as station heat rate, auxiliary consumption and secondary fuel consumption. The norms have been further tightened, which is a positive step from the consumers point of view as it would lead to reduction of consumer tariffs. It is also a constructive step from the environmental point of view as tightened norms would lead to lesser GHG emissions, which is important from Indian perspective, as not only is power sector major contributor to CO2 emissions (40-42% of total), but per capita CO2 emissions in India, although way below world average per capita emissions, are rising at three times the world average over 8-9 years.

Another positive takeaway from the proposed draft regulations is providing higher return on equity (ROE) for hydro-generation projects as compared to thermal-generation projects. This is necessary to bring parity in the effective ROE rate between hydro and thermal power generation, as hydro projects, due to their long gestation period, need higher ROE to be on par with thermal plants in effective return terms.

Finally, it is well to remember that these regulations apply to existing plants and all the PPAs signed before January 5, 2011. Thereafter, tariff is to be determined by competitive bids. As more and more capacity gets added, the share of electricity procured on cost plus return basis will decline and the regulators role in tariff determination will be of less importance to investors.

Pramod Deo & Vijay Deshpande

Pramod Deo is former chairman and Vijay Deshpande is an energy economist and former principal advisor (economics), CERC