NTPC scrip tanks 11% on harsh tariff regulations

Written by fe Bureau | New Delhi | Updated: Dec 11 2013, 09:51am hrs
The NTPC stock tumbled more than 11% on Tuesday with the Central Electricity Regulatory Commissions draft tariff regulations for 2014-19 perceived as harsh, although the regulator retained the base return of 15.5% with an additional 0.5% for timely commissioning. The proposed regulations could erode the RoE (return on equity) of NTPC and transmission companies by as much as 4% and 0.5%, respectively, Kotak Institutional Equities wrote in a report (see table). The impact on transmission firms such as Power Grid would be less severe perhaps 0.5% analysts estimated, while the impact on others like NHPC and SJVN could be minimal.

Arup Roy Choudhury, chairman, NTPC, said his firm would challenge the draft regulations on three issues. These relate to changes in the incentive scheme from PAF to PLF, the changes in heat rate incentives and plugging the tax rate arbitrage available to the company by calculating the tariff on the basis of effective tax rate rather than actual tax rate, Choudhury said.

The regulator has proposed that incentives should now be linked to both plant availability factor (PAF) as well as plant load factor (PLF) instead of only PAF earlier. A higher normative PAF has been prescribed for transmission assets. The interest on working capital will be linked to the bank rate, currently 8.75%, compared with Tuesdays SBI rate of 13.5%. The RoE is to be removed from working capital and the normative inventory months to be reduced.

The regulator also proposes a reduction in the normative station heat rate and secondary oil consumption, in what would necessitate an increase in energy efficiency of the plants for tariff benefits. The new regulations are applicable to all central-sector power plants and those generating stations supplying electricity to more than one state, besides inter-state transmission lines.

Several of the PSUs plants, especially the newer ones, are currently entitled to receive tax reimbursements from the distribution companies even as these plants virtually enjoy tax holidays. These privileges would end if the new CERC norms are implemented.

The draft regulation proposes key changes like linking generation incentives to PLF and reimbursement of corporation tax on return on equity (RoE) on the basis of actual payments made by generators rather than on normative basis as at present. Currently, discoms are required to reimburse full corporation tax payable by central power utilities on 15.5% RoE prescribed by the regulator.

Currently, generators get incentives on the basis of plant availability, measured by PAF. That means if a generator can show that its plant has normative PAF of 85%, it can claim full fixed charges from discoms even if it does not operate the plant at the full capacity. That is the reason generation loss in NTPCs plant does not affect its bottom line, though revenue takes a hit. In contrast, PLF means actual generation by a power plant. The plant may not meet the normative PLF threshold if discoms take less than allocated power or the plant does not have adequate coal.

Because of growing fuel shortage, the average PLF of NTPCs coal and gas-based power plants has fallen over the years from 91.14% in 2008-09 to 83% in 2012-13, which was less than the PLF proposed by the regulator in the draft regulations.